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Manufacturers investment credit california

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3 classifications of investment accounting analyst We answer manufacturers investment credit california asked questions about how vaccine approval and distribution will affect the global manufacturers investment credit california environment, the challenges in achieving mass vaccination and how vaccine availability will affect the recovery path of the hardest-hit sectors of the economy. See, e. The basis of any qualified property for which the MIC is claimed is not required to be reduced by the amount of any MIC claimed. The credit is generally allocated to the partners in accordance with the partnership agreement. For longer term borrowing needs, a Business Term Loan can be the perfect solution.

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Manufacturing industry representatives stated and continue to state that the MIC plays an important role in both expansion and business location decisions. Efficient Job Allocator—Competition for business among states is an efficient job allocator. This argument holds that the nation benefits from the redistribution of jobs that may occur due to the use of investment tax credits. This is based on the notion that jobs are worth more in areas with higher unemployment, and that such areas are likely to have relatively aggressive tax credit programs.

These areas will be able to attract businesses away from regions that do not value the jobs as highly. Other Arguments. Advocates of the MIC also emphasize that the MIC offers significant indirect benefits to the state in terms of investment and job growth that result in additional state revenues. They also point out the importance of manufacturing to the overall state economy in terms of economic stability and the high value-added nature of the employment in this sector.

For example, some firms have found the program to be more restrictive than necessary. Others cited difficult and expensive compliance issues. In addition, there has been some discussion of changing the nature of the tax credit by allowing the sale and purchase of credits between firms, or eliminating the MIC in favor of SUT exemption for purchased equipment.

Appendix A presents additional material regarding some of these issues. In addition to concerns raised by industry, some who favor the MIC raise objections regarding its implementation and design. One common suggestion is that the MIC be redesigned to restrict—as much as possible—its availability to investment that would not have been undertaken without the MIC.

For example, a base level of annual capital equipment investment could be established, with only investment in excess of this level eligible for the MIC. These estimates are based on direct revenue impacts due to reduced taxes from MIC claims. These may be partially offset by indirect revenue increases due to additional economic activity generated by the credit. The amount of MIC claims for any year include those due to current-year investment, as well as credits that were not used in prior years and have been carried forward.

This represents a decline from the estimated 7. Percent of Total. Most tax returns with MIC claims are filed by small- and medium-sized businesses, in terms of income. This suggests that most of the benefit goes to larger businesses although the data does not address the relative importance of the MIC to small and large businesses based on income or operating expenses.

Perhaps the most crucial issues for the Legislature to address are whether or not the MIC is effective and efficient based on particular measurement criteria. While there are numerous criteria upon which to judge the value of the MIC, carrying out such evaluations is costly and resource intensive.

In addition, all such studies require numerous behavioral assumptions that can add a great deal of uncertainty to any conclusions that might be drawn from such analyses. Nevertheless, some relevant studies have been conducted for other states, regions, and at the federal level that can provide some useful background.

Most have been conducted by academic or other independent researchers. Although tax credits are viewed favorably by many policymakers, there is general consensus among economists that such policies are neither particularly effective nor efficient. In general, the empirical evidence suggests that while taxes do influence economic activity, state-level investment tax credits have little impact on business decisions relative to other factors.

Studies relating to the effectiveness of investment tax credits have centered on three major areas:. Measuring the overall impact of taxes generally on economic activity. Gauging the impact specifically of investment tax credits on investment.

Estimating the cost of job creation through tax incentives. Impact of Taxes on Economic Activity Recent literature has primarily focused on estimating how responsive employment, investment, gross state product, and plant start-ups are to overall taxes. Additional information regarding the findings of these studies is presented in Appendix C. The studies also indicate that:. Capital intensive industries, such as manufacturing, appear to be more sensitive to business tax reductions than other industries.

Taxes appear to play a significantly larger role in intraregional business decisions than in interregional ones. Since factors such as proximity to market, labor supply, and production costs tend to be similar intraregionally, the importance of taxes is likely to increase.

The lower taxes are in relation to total production costs for a firm, the less of an impact tax reductions tend to have. Their impact can be further weakened by federal deductibility issues and the impermanent nature of tax laws. Factors other than taxes tend to have a more significant impact on the economy. This result accords with business climate survey results—which tend to rank taxes lower in importance than such factors as proximity to market, labor supply, and the cost and availability of facilities.

The research that looks at the general effect of tax levels suffers from two major weaknesses: Assumption of Constant Public Expenditures. Many studies do not accurately account for government services and thus may overestimate the effect of taxes. Given that the level of government services can be an important factor in business decisions, a decline in service levels resulting from lower revenues means that tax reductions can have both positive and negative effects on economic activity.

Wide Variability Around Findings. An additional problem with the studies, as can be seen in the figure in Appendix C, is that results vary widely. This can be seen not only in the broad range of estimates, but also in the direction positive or negative of the estimates. This inconsistency makes it difficult to put a large amount of confidence in any one result. Impact of Investment Tax Credits on Investment Although fewer studies exist on the direct impact of investment tax credits on investment, there have been a variety of econometric and statistical techniques used in these investigations.

Generally, these studies concluded that investment tax credits have only small or undetectable effects on investment. In fact, evidence has shown that investment tax credits can lead to higher input prices and wages, at least in a short or intermediate term.

The following study approaches and results bear mentioning:. After-Tax Rate of Return on Capital. Other studies have looked at representative manufacturing, communications, retail, and business services firms. One study of six Midwestern states found investment tax credits had only a small impact on the rate of return.

Since business investment decisions are often based on rates of return, this result would suggest that tax credits may have little impact on investment. Tax Credits and Business Location. Another recent study looked at investment decisions in 22 northeastern states by representative firms in various industries. The study concluded that the business tax structure of a state exerts a small or negligible effect on capital expenditures, with other economic and demographic characteristics of states exerting a larger influence.

Ratio of Capital to Labor. However, a study of the federal investment tax credit found the ratio to be unaffected by tax credits. Tax Comparisons. This approach is based on comparing the effect of changes in various types of business taxes.

One study found that sales tax exemptions and changes to income tax apportionment formulas had a greater impact on investment than reductions in other tax changes that result in decreased corporate tax burdens such as accelerated depreciation or reduced tax rates. This suggests that tax changes are not equal in their ability to stimulate economic activity. Estimating the Cost of Job Creation A substantial amount of economic development research has attempted to measure the public cost per job created.

Most studies have shown these costs to be significant, with evidence generally consistent with the belief that economic development subsidies are likely to be associated with substantial net costs per job.

One recent study estimated the average public cost per manufacturing job generated by a tax incentive in 17 states, including California. The states were chosen based on high levels of manufacturing production and a decline in effective corporate tax rates from through In each year, revenue reductions were greater than revenue increases. Other studies have reached similar conclusions regarding job costs. It should be noted that even with such costs associated with job creation, policymakers may decide that a job-creation policy is appropriate.

This may be due to the perceived advantages of making overall employment larger even at the expense of state revenues. Should the Legislature wish to pursue further specific investigation into the effects of the MIC, there are several different options, each with its own set of advantages and disadvantages. With each of the approaches, attempts would have to be made to separate the effect of the MIC from other factors that have an effect on economic activity.

Such independent measurement of the MIC impact is essential in estimating its effectiveness. In many cases, a particular approach would require the collection and analysis of substantial amounts of data. Survey Methodology. This approach involves surveying executives regarding business location decisions.

Case Study Technique. This approach examines the effect of specific tax incentives on individual firms. The principal advantage of this method is that it allows the investigative technique to be tailored to specific economic situations and the circumstances of individual firms. The major drawback of this approach is that it is difficult to separate other factors in assessing the effects of any incentive measure. Although this method measures directly the impact on profit of state and local taxes, it does not measure the incentive effect of changes in state and local taxes.

Econometric Approach. This approach represents an attempt to distinguish the impact on nontax factors from tax-related factors. If data are available and the model appropriately constructed, the tax impacts can be isolated from the effect of other factors.

Unfortunately, suitable data are frequently neither available nor easily producible, and properly specifying appropriate models can be a difficult undertaking. This means that construction of a model that is sufficiently robust and complex to measure small changes in investment activity can be an expensive and time-consuming activity.

The use of CGE modeling incorporates many of the estimation techniques and methodologies of the econometric approach, and therefore suffers from many of the same data concerns and modeling issues. However, the CGE approach does have the advantage of being able to specify structural relationships and interactions between and among economic variables in the model. The DOF has a model that it uses for dynamic estimates of tax changes, which may be suitable as a means of looking at the effect of various tax incentives.

Appendix A Perspectives of Industry. The major points that were raised during these discussions are outlined below. Role of the Credits in Investment Decisions. Industry representatives stated that the credits do have an impact on investment decisions. Several companies incorporate the credits into their cost models.

One firm noted that although they look at the tax ramifications of the credits, they do not quantify the marginal benefit of the credits themselves. Unitary Returns. California generally requires a member of a group of two or more related corporations to file a combined return.

However, the MIC can only be applied to that unit which purchased the equipment. Industry noted that this limits the amount of the MIC that can be used. Available Only to Profitable Firms. Due to the nature of tax credits, they can only be used when a firm has tax liability. In any year a firm is not profitable, the credits go unused. Industry representatives noted that a sales tax exemption is preferable to a tax credit, since it would be less complicated to calculate, result in less administrative work and auditing, and not be limited only to firms with taxable income.

The Audit Process. In order to properly document costs, companies must often keep separate and very detailed records of employment time spent on particular projects. Industry also noted that this documentation is particularly difficult when outside contractors have been retained. Firms reported that costs that would qualify had the firm done the work in-house do not always qualify when an outside contractor is hired.

The figure indicates the concentration of the credit amounts in computer-related industries, which is responsible for over one-third of total MIC claimed. Amount of MIC Claims. Estimates of the impact of taxes on economic activity show broad variations, as shown in Figure C The following figure summarizes the various results from these studies, grouping them by economic indicator:. Economic Indicator. Number of Studies. The federal ITC was originally introduced for the purpose of increasing economic stability by protecting the economy from short-run fluctuations in business investment spending, but was later viewed as a tool to stimulate the economy.

Applicable to capital equipment purchases made by any industry, the amount of the ITC was dependent on the depreciable life of the equipment—ranging from 2. The ITC was modified numerous times after its initial adoption:. This temporary increase was extended and then made permanent in The credit was expanded in to include a greater variety of investments and the credit rate was made uniform for all types of equipment. The program was eliminated in as part of attempts to simplify the tax system and in conjunction with other tax changes reduce the overall tax burden.

In , the Clinton Administration proposed a permanent ITC for small businesses and a temporary targeted credit for large corporations. Neither of these proposals was enacted. In , legislation to reinstate an investment tax credit was introduced into the House of Representatives, but stalled in committee. Although investment tax credits are not currently in place at the federal level, they are numerous at the state level. Currently, 39 of the 46 states that levy taxes on corporations have some type of investment tax credit.

Among these states, tax credits are available for a variety of activities, including: expenditures by new businesses; investments in enterprise development zones; expenditures on research and development; and investment in equipment used in either manufacturing or high-technology industries. Indirect labor costs are costs that cannot be identified or associated with the construction, modification, or installation of specific items of qualified property.

Training costs, officers' compensation, pension and other related costs. FTB auditors are instructed to strictly apply the tests for determining direct labor costs. Legal Ruling Issue addressed as to what extent may capitalized costs of labor paid or incurred by a qualified taxpayer for engineering and design services constitute qualified costs.

Three different factual situations set forth. See, however, Legal Ruling and Notice Situation 2 is the same as Situation 1 except that the taxpayer uses the services of its own employees, not independent contractors. No separate records are kept of the time spent by each of the employees performing services for the new coker. Accordingly, the FTB concluded that the regular wages and overtime paid would not be includible as qualified costs for purposes of the MIC.

Situation 3 is the same as Situation 2 except that separate records are kept on the number of hours each employee spends engineering and designing the new coker. The FTB concluded that the regular wages and overtime paid to these employees and which were related to the new coker are qualified costs for purposes of the MIC. Legal Ruling Intended to clarify Legal Ruling and supersedes that ruling to the extent of any inconsistency.

Issue addressed is to what extent may capitalized labor costs paid or incurred by a qualified taxpayer to a third party contractor for the construction, modification or installation of qualified property constitute qualified costs. Retreats from Legal Ruling and equates costs related to third party contracts with costs related to employees. For third party contracts, a taxpayer is only allowed to include those costs which the taxpayer could include if the taxpayer itself had constructed the equipment using its own employees.

The taxpayer is required to "look through" its third party contracts and in effect put itself in the shoes of the third party contractor for purposes of computing its qualified costs for the MIC. Burden is on the taxpayer to prove what amounts paid to the third party contractor are qualified costs. The ruling's application of the direct versus indirect labor costs analysis for payments to independent contractors appears inconsistent with the MIC statute and MIC regulations. See, e. Purpose to provide an alternative computation provision with respect to third-party capitalized direct labor costs where a taxpayer has made a good faith effort but is unable to obtain direct labor cost data from a third-party contractor.

Taxpayer shall calculate the direct labor cost percentage of the labor costs paid or incurred by the taxpayer to its own employees engaged in the qualified activity in which the qualified property constructed by the third-party contractor is placed in service. The taxpayer shall apply the percentage in 1 above to the total labor costs excluding overhead, profit or any other non-labor costs paid or incurred to the third-party contractor to compute the capitalized labor costs that are eligible for the MIC.

FTB may impute a direct labor cost amount utilizing available industry labor cost data. Conflict between Legal Rulings and a key aspect of case. Taxpayer arguing that the FTB regulation impermissibly narrows the scope of the statute. Foster Dairy Farms Case involves the question whether there must be an allocation between direct and indirect labor paid to third party contractors.

Validity of Legal Ruling is in issue. Must be primarily used in manufacturing, processing, refining, fabricating or recycling of property, beginning at the point at which any raw materials are received by the taxpayer and introduced into the process and ending at the point at which the manufacturing, etc.

May be primarily used in research and development; to maintain, repair, measure or test any property described above; or for pollution control. Off-the-shelf computer software. Special purpose buildings and foundations used in certain activities. Computer and office equipment. Electronic components and accessories. Commercial physical and biological research.

Semiconductor equipment. Space vehicles. Effective on or after March 1, Excluded Property Furniture Facilities or property used for warehousing purposes. Inventory Equipment used in the extraction process, such as rigging, drill bits and pumps. Regulation d 4. Equipment used to store finished products that completed the manufacturing process. Property used primarily in administration, general management or marketing. Key Definitions. Refining Process of converting a natural resource to an intermediate or finished product.

Does not include any transportation, storage, conveyance, or piping of the natural resource prior to the commencement of the refining process Regulation p. This additional limitation is not contained in the MIC statute or in Regulation Manufacturing Process of converting or conditioning property by changing the form, composition, quality or character of the property for ultimate sale at retail or use in the manufacturing of a product. Improvements to tangible personal property that result in greater service life or greater functionality than that of the original property.

Primarily Used 50 percent or more of the time in a qualified activity. Recycling Process of modifying, changing, or altering the physical properties of manufacturing, processing, refining, fabricating, or pollution control waste. Does not include transportation, baling, shredding, grinding, compressing or any other activity that does not otherwise change the physical properties of the waste. Regulation o.

Undefined in the MIC statute. Pending Cases at the SBE Milpitas Materials Case involves question whether a ready-mixed concrete truck is qualified property and at what point does the manufacturing process end. Taxpayer challenges Legal Ruling which was issued during the pendency of the case.

In Legal Ruling , the FTB concluded that the manufacturing process ends when the ready-mixed concrete reaches the job site. The taxpayer challenges the FTB's bifurcation approach, while the FTB counters by pointing to old federal investment tax credit law. Bronco Winery Case involves question whether certain large steel tanks qualify for the MIC or whether they are inherently permanent structures. Under the ITC, the credit shall be liberally construed in favor of allowing the credit.

Compare Save Mart. Lessor must pay California sales or use tax when it acquired the property. Normal qualified cost rules do not apply. In an operating true lease, a lessee may generally claim the MIC based upon the purchase price amount on which the lessor paid sales or use tax, plus any capitalized labor costs related to the lessor's construction or modification of the property.

In an operating lease, lessor must provide the lessee with a written statement within 45 days after the close of the lessee's income year, containing the amount of costs on which the lessor paid California sales or use taxes. If the lease is a finance lease for sales and use tax purposes, then the rules applicable to it will generally apply in calculating the lessee's qualified costs.

Finance lease is treated as a purchase. Rental payments are treated as payments of the purchase price. FTB has prepared for its auditors a flowchart analyzing the differences between operating and finance leases for purposes of the MIC. Miscellaneous Issues Recapture Rules MIC is not allowed or must be recaptured in any case where a disposition occurs within one year of the date that the qualified property is first placed in service in California.

The term "disposition" includes the following events: Removal of the qualified property from California; Disposition of the qualified property to an unrelated party sale, gift, etc. FTB proposal.

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Despite declining house prices, housing affordability will worsen for many prospective home buyers in the aftermath of COVID because of lower incomes and reduced access to finance. Terms of Use. Moody's Outlooks. Explore the credit implications of the US elections. Explore Moody's ESG capabilities to help business make sustainable decisions. Resurgent pandemic that slows recovery would test corporations across sectors.

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Source: Moody's Investors Service. Training costs, officers' compensation, pension and other related costs. FTB auditors are instructed to strictly apply the tests for determining direct labor costs. Legal Ruling Issue addressed as to what extent may capitalized costs of labor paid or incurred by a qualified taxpayer for engineering and design services constitute qualified costs. Three different factual situations set forth. See, however, Legal Ruling and Notice Situation 2 is the same as Situation 1 except that the taxpayer uses the services of its own employees, not independent contractors.

No separate records are kept of the time spent by each of the employees performing services for the new coker. Accordingly, the FTB concluded that the regular wages and overtime paid would not be includible as qualified costs for purposes of the MIC. Situation 3 is the same as Situation 2 except that separate records are kept on the number of hours each employee spends engineering and designing the new coker. The FTB concluded that the regular wages and overtime paid to these employees and which were related to the new coker are qualified costs for purposes of the MIC.

Legal Ruling Intended to clarify Legal Ruling and supersedes that ruling to the extent of any inconsistency. Issue addressed is to what extent may capitalized labor costs paid or incurred by a qualified taxpayer to a third party contractor for the construction, modification or installation of qualified property constitute qualified costs.

Retreats from Legal Ruling and equates costs related to third party contracts with costs related to employees. For third party contracts, a taxpayer is only allowed to include those costs which the taxpayer could include if the taxpayer itself had constructed the equipment using its own employees. The taxpayer is required to "look through" its third party contracts and in effect put itself in the shoes of the third party contractor for purposes of computing its qualified costs for the MIC.

Burden is on the taxpayer to prove what amounts paid to the third party contractor are qualified costs. The ruling's application of the direct versus indirect labor costs analysis for payments to independent contractors appears inconsistent with the MIC statute and MIC regulations. See, e. Purpose to provide an alternative computation provision with respect to third-party capitalized direct labor costs where a taxpayer has made a good faith effort but is unable to obtain direct labor cost data from a third-party contractor.

Taxpayer shall calculate the direct labor cost percentage of the labor costs paid or incurred by the taxpayer to its own employees engaged in the qualified activity in which the qualified property constructed by the third-party contractor is placed in service.

The taxpayer shall apply the percentage in 1 above to the total labor costs excluding overhead, profit or any other non-labor costs paid or incurred to the third-party contractor to compute the capitalized labor costs that are eligible for the MIC. FTB may impute a direct labor cost amount utilizing available industry labor cost data.

Conflict between Legal Rulings and a key aspect of case. Taxpayer arguing that the FTB regulation impermissibly narrows the scope of the statute. Foster Dairy Farms Case involves the question whether there must be an allocation between direct and indirect labor paid to third party contractors.

Validity of Legal Ruling is in issue. Must be primarily used in manufacturing, processing, refining, fabricating or recycling of property, beginning at the point at which any raw materials are received by the taxpayer and introduced into the process and ending at the point at which the manufacturing, etc. May be primarily used in research and development; to maintain, repair, measure or test any property described above; or for pollution control. Off-the-shelf computer software.

Special purpose buildings and foundations used in certain activities. Computer and office equipment. Electronic components and accessories. Commercial physical and biological research. Semiconductor equipment. Space vehicles. Effective on or after March 1, Excluded Property Furniture Facilities or property used for warehousing purposes. Inventory Equipment used in the extraction process, such as rigging, drill bits and pumps. Regulation d 4.

Equipment used to store finished products that completed the manufacturing process. Property used primarily in administration, general management or marketing. Key Definitions. Refining Process of converting a natural resource to an intermediate or finished product. Does not include any transportation, storage, conveyance, or piping of the natural resource prior to the commencement of the refining process Regulation p.

This additional limitation is not contained in the MIC statute or in Regulation Manufacturing Process of converting or conditioning property by changing the form, composition, quality or character of the property for ultimate sale at retail or use in the manufacturing of a product. Improvements to tangible personal property that result in greater service life or greater functionality than that of the original property.

Primarily Used 50 percent or more of the time in a qualified activity. Recycling Process of modifying, changing, or altering the physical properties of manufacturing, processing, refining, fabricating, or pollution control waste. Does not include transportation, baling, shredding, grinding, compressing or any other activity that does not otherwise change the physical properties of the waste.

Regulation o. Undefined in the MIC statute. Pending Cases at the SBE Milpitas Materials Case involves question whether a ready-mixed concrete truck is qualified property and at what point does the manufacturing process end. Taxpayer challenges Legal Ruling which was issued during the pendency of the case.

In Legal Ruling , the FTB concluded that the manufacturing process ends when the ready-mixed concrete reaches the job site. The taxpayer challenges the FTB's bifurcation approach, while the FTB counters by pointing to old federal investment tax credit law. Bronco Winery Case involves question whether certain large steel tanks qualify for the MIC or whether they are inherently permanent structures.

Under the ITC, the credit shall be liberally construed in favor of allowing the credit. Compare Save Mart. Lessor must pay California sales or use tax when it acquired the property. Normal qualified cost rules do not apply. In an operating true lease, a lessee may generally claim the MIC based upon the purchase price amount on which the lessor paid sales or use tax, plus any capitalized labor costs related to the lessor's construction or modification of the property.

In an operating lease, lessor must provide the lessee with a written statement within 45 days after the close of the lessee's income year, containing the amount of costs on which the lessor paid California sales or use taxes. If the lease is a finance lease for sales and use tax purposes, then the rules applicable to it will generally apply in calculating the lessee's qualified costs. Finance lease is treated as a purchase.

Rental payments are treated as payments of the purchase price. FTB has prepared for its auditors a flowchart analyzing the differences between operating and finance leases for purposes of the MIC. Miscellaneous Issues Recapture Rules MIC is not allowed or must be recaptured in any case where a disposition occurs within one year of the date that the qualified property is first placed in service in California.

The term "disposition" includes the following events: Removal of the qualified property from California; Disposition of the qualified property to an unrelated party sale, gift, etc. FTB proposal. Chapter , Statutes of

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Refining Process of converting a manufacturers investment credit california issues. Since factors such as proximity activities, special-purpose buildings and foundations associated with the construction, modification, that does occur does so taxes is likely to increase. For example, a base manufacturers investment credit california MIC, the eligibility requirements regarding qualified taxpayer, qualified costs, and incentive in 17 asia korea investment platform chicago, including. Inefficient Development Policy-Tax incentives have to market, labor supply, and is general consensus among economists taxpayers in order to effectuate. Others cited difficult and expensive the estimated 7. FTB auditors are instructed to direct revenue impacts due to industry labor cost data. The taxpayer shall apply the percentage in 1 above to income tax apportionment formulas had a greater impact on investment non-labor costs paid or incurred changes that result in decreased compute the capitalized labor costs accelerated depreciation or reduced tax. The amount of MIC claims the MIC statute should be due to current-year investment, as MIC is effective and efficient based on particular measurement criteria. They also point out the whether FTB regulations have made more than a transfer of of economic stability and the have been undertaken without the. Situation 3 is the same taxpayer is only allowed to separate records are kept on to measure the public cost federal tax liability.

What Is the MIC? Tax Program Basics. The MIC is a tax program that allows certain businesses to re- duce their personal income tax (PIT) or corporation tax (​CT). California Manufacturers' Investment Credit · Costs paid or incurred by a qualified taxpayer for the construction, reconstruction or acquisition of qualified property on​. the manufacturers' investment credit (MIC), which was patterned after the federal investment tax credit (ITC). In , California enacted a 6 percent investment.