HAR § 18-235-110.7-04 — Section 38 property

(a) In general. Section 38 property is defined as: (1) Property which is (A) tangible personal property, or (B) other tangible property; (2) Recovery property (within the meaning of I.R.C. section 168, without regard to useful life), or any other property with respect to which depreciation is allowable to the taxpayer; and (3) Property which has an estimated useful life or recovery period (determined as of the time the property is placed in service) of three years or more. A property shall have the same estimated useful life or recovery period as that which is used for depreciation or ACRS purposes. (b) Tangible personal property. (1) In general. Tangible personal property (other than a central air conditioning or heating unit), as defined in paragraph (2), may qualify as section 38 property regardless of whether it is used as an integral part of an activity (or constitutes a research or storage facility used in connection with such activity) specified in subsection (c). (2) “Tangible personal property”, defined. For purposes of the credit, the term tangible personal property” means any tangible property except land and improvements thereto, HRS §235-110.7 HRS §235-110.7 §18-235-110.7-04 such as buildings or other inherently permanent structures (including items which are structural components of the buildings or structures). The terms “building” and “structural components” are defined in subsection (1). Thus, buildings, swimming pools, paved parking areas, wharves, docks, bridges, and fences are not tangible personal property. Tangible personal property includes all property (other than structural components) which are contained in or attached to a building. Property such as production machinery, printing presses, transportation and office equipment, refrigerators, grocery counters, testing equipment, display racks and shelves, and neon and other signs, which are contained in or attached to a building constitute tangible personal properties for purposes of the credit. Further, all property in the nature of machinery (other than structural components of a building or other inherently permanent structure) shall be considered tangible personal property even though located outside a building. For example, a gasoline pump, hydraulic car lift, or automatic vending machine, although annexed to the ground, shall be considered tangible personal property. (c) Other tangible property. In addition to tangible personal property, other tangible property (not including a building and its structural components) may qualify as section 38 property if one of the following three conditions is met: (1) The property is used as an integral part (as defined in subsection (d)) of manufacturing, production, extraction, or furnishing transportation, communication, electrical energy, gas, water, or sewage disposal services; (2) The property is a research or storage facility used in connection with an activity referred to in paragraph (1): (A) Examples of research facilities include wind tunnels and test beds; (B) Examples of storage facilities include oil and gas storage tanks; (C) Although a research or storage facility must be used in connection with one of the specified activities in paragraph (1), the taxpayer-owner of the facility need not be engaged in the specified activity. For example, if a research or storage facility is used in connection with a manufacturing process, the taxpayer-owner of the facility need not be engaged in the manufacturing process; or (3) The property is a facility used in connection with an activity referred to in paragraph (1) for the bulk storage of fungible commodities (including commodities in a liquid or gaseous state). (d) “Integral part”, defined. Property is used as an integral part of one of the specified activities in subsection (c) if it is used directly in the activity and is essential to the completeness of the activity. (1) Examples include fences used to confine livestock and telephone poles. In the case of manufacturing, for example, all properties used by a taxpayer to acquire or transport raw materials or supplies to the point where the actual processing commences (e.g., dock), or to process raw materials into the taxpayer’s final product, are considered property used as an integral part of manufacturing. (2) Property such as pavements, paved parking areas, inherently permanent advertising displays, inherently permanent outdoor lighting facilities, or swimming pools, although used in the operation of a business, ordinarily is not used as an integral part of any of the specified activities in subsection (c), and therefore does not qualify for the credit. (3) Property shall be considered to be used as an integral part of one of the specified activities in subsection (c) if it is used by either the owner of the property or the lessee of the property. (e) “Manufacturing, production, and extraction”, defined. The terms manufacturing, production, and extraction include: (1) the construction, reconstruction, or making of property out of scrap, salvage, junk, new, or raw material by processing, manipulating, refining, or changing the form of an article, or by combining or assembling two or more articles; (2) the cultivation of the soil; (3) the raising of livestock; and (4) the mining of minerals. Examples include property used as an integral part of the extraction, processing, or refining of metallic and nonmetallic minerals; the construction of roads, bridges, or housing; the processing of meat, fish, or other foodstuffs; the cultivation of orchards, gardens, or nurseries; the production of lumber, lumber products, or other building materials; the fabrication or treatment of textiles, paper, or glass; and the rebuilding, as distinguished from the mere repairing, of machinery. (f) “Transportation business”, defined. A transportation business includes airlines, bus companies, shipping or trucking companies, and oil pipeline companies. (g) “Communication business”, defined. A communication business includes telephone, telegraph, or cable companies, and radio or television broadcasting companies. (h) “Bulk storage”, defined. Bulk storage means the storage of a commodity in a large mass prior to its consumption or use. For example, if a facility is used to store macadamia nuts which have not been sorted or processed, §18-235-110.7-04 the facility is used for bulk storage; however, if a facility is used to store macadamia nuts that have been sorted and canned, it is not used for bulk storage. (i) Recovery or depreciable property requirement. Section 38 property must be either recovery property (within the meaning of I.R.C. §168, without regard to useful life), or any other property with respect to which depreciation is allowable to the taxpayer. (1) If only part of a property is depreciable, only a pro rata portion of the property may qualify as section 38 property. (2) Example. Paragraph (1) is illustrated as follows: A property is used 90 per cent of the time in a trade or business, and 10 per cent of the time for personal purposes. In this case, only 90 per cent of the basis of the property may qualify as section 38 property which is eligible for the credit. (3) Property does not qualify as section 38 property to the extent that a deduction for depreciation thereon is disallowed under I.R.C. §274 (regarding the disallowance of certain entertainment, etc., expenses). (j) Boilers fueled by oil or gas. Generally, any boiler, used in Hawaii, which is primarily fueled by petroleum or petroleum products (including natural gas) qualifies as section 38 property. (k) Energy property. (1) In general. Certain energy property qualifies as section 38 property. The energy property must be intended to reduce the amount of oil, natural gas, or other energy consumed in heating or cooling a building or used in an industrial process. (2) “Energy property”, defined. Energy property is: (A) Alternative energy property. Alternative energy property consists of the following types of property: (i) A boiler, the primary fuel for which will be an alternate substance. An alternate substance is any substance other than oil, natural gas, or any product of oil and natural gas; (ii) A burner (including necessary on-site equipment to bring the alternate substance to the burner) for a combustor other than a boiler if the primary fuel for the burner will be an alternate substance; (iii) Equipment for converting an alternate substance into a synthetic liquid, gaseous, or solid fuel; (iv) Equipment designed to modify existing equipment which uses oil or natural gas as fuel or as feedstock so that the existing equipment will use either a substance other than oil and natural gas, or oil mixed with a substance other than oil and natural gas (where the other substance will provide not less than twenty-five per cent of the fuel or feedstock); (v) Equipment to convert coal (including lignite), or any non-marketable substance derived therefrom, into a substitute for a petroleum or natural gas derived feedstock for the manufacture of chemicals or other products, or coal (including lignite), or any substance derived therefrom, into methanol, ammonia, or a hydroprocessed coal liquid or solid; (vi) Pollution control equipment required (by federal, state, or local regulations) to be installed on or in connection with equipment described in clauses (i) to (v); (vii) Equipment used for the unloading, transfer, storage, reclaiming from storage, and preparation (including, but not limited to, washing, crushing, drying, and weighing) at the point of use for an alternate substance for use in equipment described in clauses (i) to (vi). This includes equipment used for the storage of fuel derived from garbage at the site at which fuel was produced from garbage; and (viii) Equipment used to produce, distribute, or use energy from a geothermal deposit, but only, in the case of electricity generated by geothermal power, up to (but not including), the electrical transmission state. A geothermal deposit is a geothermal reservoir consisting of natural heat which is stored in rocks or in an aqueous liquid or vapor (whether or not under pressure). The deposit shall not be treated as a gas well. (B) Solar or wind energy property. Solar or wind energy property means any equipment which uses solar or wind energy to: (i) Generate electricity;