1. (a) In General. For purposes of Regulations 23636-1 through 23636-9, inclusive, the term “qualified wages” shall mean that portion of wages paid or incurred by the qualified taxpayer to qualified employees that are direct labor costs, as used in Internal Revenue Code section 263A and defined in the regulations thereunder, included in inventory costs for property manufactured in this state by the qualified taxpayer for ultimate use in a Joint Strike Fighter. For this purpose, the term employee encompasses both full-time and part-time employees but shall not include contract employees or independent contractors referenced in Treasury Regulation section 263A-1. Qualified wages shall include wages for engineering, design, and testing activities to the extent those wages are treated as direct labor costs capitalized to and included in inventory costs for property manufactured in this state by the qualified taxpayer for ultimate use in a Joint Strike Fighter under the same method of allocation for California income or franchise tax purposes that the taxpayer used for federal income tax purposes under the uniform capitalization allocation rules specified in Treasury Regulation section 1.263A-1 (as in effect on the date Regulation 23636-4 is effective).

   1. (1) Direct labor costs shall include all elements of compensation, such as basic compensation, overtime pay, vacation pay, holiday pay, sick leave pay (other than payments pursuant to a wage continuation plan under Internal Revenue Code section 105(d) as it existed prior to its repeal in 1983), shift differential, payroll taxes, and payments to a supplemental unemployment benefit plan, but shall not include any indirect labor costs.
   2. (2) Indirect labor costs shall include that portion of qualified wages that are not direct labor costs. Indirect labor costs include, but are not limited to, training costs, officers' compensation, pension and other related costs, and employee benefit expenses (including payments pursuant to a wage continuation plan under Internal Revenue Code section 105(d) as it existed prior to its repeal in 1983).

   3. (3) In determining whether direct costs of labor are properly included in inventory costs for property manufactured in this state by the qualified taxpayer for ultimate use in a Joint Strike Fighter, the qualified taxpayer shall be required to use the same method of allocation for California income or franchise tax purposes that the taxpayer used for federal income tax purposes under the uniform capitalization allocation rules specified in Treasury Regulation section 1.263A-1 (as in effect on the date Regulation 23636-4 is effective).

      EXAMPLE 1: A, a qualified taxpayer, manufactures aircraft navigational instruments in its plant in Lancaster. A's manufacturing facility employees 20 people that assemble the instrument components. Assume that all of A's employees' activities are allocable to property manufactured in this state by the qualified taxpayer designed for ultimate use in a Joint Strike Fighter. A pays its employees $20 per hour, plus the following amounts as an employer: Social Security $1.54; Unemployment Insurance $.18; Workers' Compensation Insurance $.60; Health and Life Insurance $2.08 and Retirement Benefits $1.68 for total compensation of $26.08 per hour. Pursuant to Treasury Regulation section 263A-1, the Workers' Compensation Insurance, Health and Life Insurance and Retirement Benefits amounts are classified as indirect labor costs and are not qualified wages. Accordingly, $21.72 of the total wages of $26.08 paid by A constitute direct labor costs and qualified wages for purposes of Revenue and Taxation Code section 23636 and this regulation.

      EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except A purchases pressurized sealing equipment for the navigational instruments and installs the equipment in B's manufacturing facility located in Burbank. A then enters into a contract with B to pressure seal all of A's navigational equipment following assembly by A. A pays B a specified hourly rate for sealing the equipment. B is properly classified as an independent contractor. Under these facts, even though the payments are made to operate equipment owned by A, the payments to B are not qualified wages as B is not an employee of A and the payments are not qualified wages eligible for the credit. However, if B is a qualified taxpayer and B meets all of the other requirements of Revenue and Taxation Code section 23636 and this regulation, B would be able to claim the JSF Wage Credit for wages paid to its own employees, if any, in connection with the instrument sealing activity.

2. (b) Amount of Qualified Wages. The amount of qualified wages allowed as a credit under Section 23636 and this regulation shall be as follows:

   1. (1) Fifty percent of qualified wages paid or incurred during any taxable year beginning on or after January 1, 2001, and before January 1, 2002.
   2. (2) Forty percent of qualified wages paid or incurred during any taxable year beginning on or after January 1, 2002, and before January 1, 2003.
   3. (3) Thirty percent of qualified wages paid or incurred during any taxable year beginning on or after January 1, 2003, and before January 1, 2004.
   4. (4) Twenty percent of qualified wages paid or incurred during any taxable year beginning on or after January 1, 2004, and before January 1, 2005.
   5. (5) Ten percent of qualified wages paid or incurred during any taxable year beginning on or after January 1, 2005, and before January 1, 2006.

Qualified Wages -- (See Regulation 23636-0 for Table of Contents.)

Note: Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23636, Revenue and Taxation Code.

History

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).