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State of California Franchise Tax Board

Analysis of Qualified Costs

Analysis of Qualified Costs
(After Identification of Qualified Taxpayer and Qualified Property)
Note: Classification of Qualified Costs (Yes, No, Possibly) is based on a reading of the regulations under 263A and tax accounting concepts. This classification is consistent with that of various tax services.

Capitalized Direct Production Costs (1): Qualified MIC Costs?
Direct Labor costs Yes
Materials costs Yes
Capitalized Indirect Production Costs (2) :
Bidding costs No
Capitalizable service costs No
Engineering and design costs (3) Possibly
Handling costs (4) Possibly
Indirect labor costs No
Indirect material costs (4) Possibly
Insurance No
Interest No
Licensing and franchise costs No
Officer's compensation (5) Possibly
Pension and other related costs No
Purchasing costs Yes
Quality control No
Rents No
Repairs and maintenance (6) Possibly
Spoilage No
Storage costs No
Taxes (any type) No
Tools and equipment (4) Possibly
Utilities No
Deductible Indirect Production Costs:
Cost recovery allowances (idle equipment) No
Deductible service costs No
Income taxes No
IRC §165 losses No
IRC §179 costs No
On-site storage costs No
IRC §174 research & experimental costs (4, 7, 8) Possibly
Selling and distribution costs No
Strike expenses No
Unsuccessful bidding costs No
Warranty and product liability costs (4, 8) Possibly
1 As defined in Treasury Regulation §1.263A-1(e)(2)(i).
2 As defined in Treasury Regulation §1.263A-1(e)(3)(ii).
3 Refer to FTB Legal Rulings 98-1 and 2000-1.
4 Will qualify only if sales or use tax has been paid on these costs.
5 Will qualify only if officer's activity would otherwise qualify as direct labor.
6 For materials used in the activity, sales or use tax must be paid, plus any direct labor costs.
7 As provided in Treasury Regulation §1.263A-1(e)(3)(iii), may qualify if capitalized.
8 May qualify as an "auxiliary establishment".

Revised: August 29,2002

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