Review the fact sheet from the client and the additional resources provided. Prepare a summary calculating the MACRS tax depreciation expense from the building, building shell, and equipment. Then, review the federal tax rules regarding incentives and conclude whether the $2M state grant would qualify for IRC Section 118.

Review the state information and resources provided and recommend whether to locate the project in Ohio or Virginia from the state tax perspective, taking into account that Virginia has a traditional state income tax while Ohio has a tax on Commercial activity, not income.

Document your conclusions in the template using the IRAC format provided.

Issues:

1.

2.

3.

Research:

Analysis:

Federal Issues:

State Issues:

Conclusions:

Facts for project provided below:

Total project cost estimate $73,000,000 as follows:

Site selection and project oversight $8,000,000 consulting fees

Land and new road construction $9,000,000

New building shell $10,000,000

Building improvements such as air conditioning, overhead cranes, and other building fixtures $5,000,000

Movable equipment such as forklifts, material handling, and other machines $20,000,000

New product inventory $23,000,000

State cash grant (from either state) to build new road, which offsets project costs $2,000,000

Net cost after grant $73,000,000

For purposes of this project, assume the half-year MACRS convention applies, and the amount of equipment placed in service by the client does not qualify for the 179 allowance. Also assume no bonus depreciation is allowable.

Also for tax purposes, note that generally the receipt of a cash grant would generally be taxable, unless a special exemption under IRC section 118 would apply to the grant.

The project is expected to generate additional sales from the fulfillment center of $25,000,000 and expected net taxable income apportioned to the location of $5,000,000 attributable to these activities. There is no other property, payroll, or sales in the two states under consideration.

Potential state locations:

Ohio

Virginia

The client had federal taxable income of approximately $35,000,000 in 2020, the most current tax year.

The project is expected to be completed by December 2021 and placed in service in January 2022.

The client is headquartered in Pennsylvania and files state income taxes only in Pennsylvania as of 2020.