Carryover of Credit for Machinery and Equipment (14 Years)

The Carryover of Credit for Machinery and Equipment (Legacy Code 13) refers to a Utah tax provision allowing a 14-year carryforward of unused 6% credits for research assets purchased between 1999 and 2010. While new credits can no longer be generated under this specific statute, the carryover remains a valid nonrefundable offset for taxpayers with historical excess credits.

Historical Evolution and Legislative Intent of Utah Research Incentives

The fiscal landscape of the State of Utah has long been characterized by a strategic focus on cultivating a high-tech industrial base, colloquially known as the “Silicon Slopes.” To understand the specific mechanism of the 14-year carryover for machinery and equipment, one must examine the broader legislative trajectory that began in the late 1990s. During the 1999 General Session, the Utah Legislature introduced Senate Bill 8, which sought to aggressively incentivize capital-intensive research activities. This legislation established two distinct paths for research-related tax relief: the “Credit for Increasing Research Activities” (now Code 12) and the “Credit for Machinery and Equipment Used to Conduct Research” (now legacy Code 13).

The intent behind the machinery and equipment credit was to lower the barrier to entry for firms requiring significant hardware investments, such as aerospace manufacturers, biotechnology labs, and software development firms requiring large-scale computing infrastructure. At the time of its enactment, the credit was set at 6% of the purchase price, including installation costs, but excluding sales and use taxes. The 14-year carryover period was a deliberate policy choice intended to accommodate the long-term profitability cycles of technology startups, which often incur massive capital expenses years before achieving a positive tax liability.

As the state’s economy matured, the focus of the Utah State Tax Commission and the Legislature shifted from incentivizing hardware toward rewarding sustained increases in human capital and operational research expenditures. Consequently, the machinery and equipment credit was allowed to sunset for new purchases on December 31, 2010. From January 1, 2011, onward, the state consolidated its research incentives under the “Increasing Research Activities” credit, which is more closely aligned with the federal guidelines of Internal Revenue Code (IRC) Section 41. Despite the sunset of the machinery credit itself, the “savings clause” in the tax code ensures that the 14-year carryforward remains available to those who earned the credits during the active period of 1999–2010.

Statutory Analysis of the Machinery and Equipment Credit

The legal authority for the machinery and equipment credit was originally codified in Utah Code § 59-7-613 for corporations and § 59-10-1013 for individuals and pass-through entities. Although these sections were technically removed from the active code in recent legislative “clean-up” sessions (such as the 2023 repeal of obsolete language), the right to utilize the carryforward is protected by the original statutory language which granted a “next 14 taxable years” window.

Definition of Qualified Assets and Usage

Under the original statute, “equipment” was defined to include computers, computer equipment, and computer software. To qualify for the 6% credit, the machinery or equipment had to be “primarily used” for conducting qualified research or basic research within the state of Utah. The term “primarily used” has been administratively interpreted by the Utah State Tax Commission to mean that more than 50% of the asset’s functional time must be dedicated to research activities as defined by IRC Section 41(d).

A critical component of the eligibility was the 12-month rule. A taxpayer was prohibited from claiming the credit or carrying it forward if the machinery or equipment was used for qualified research in Utah for a period of less than 12 consecutive months. This provision was designed to prevent “tax-motivated asset shuffling,” where a company might move a piece of equipment into a Utah facility just long enough to trigger the 6% credit before relocating it to another jurisdiction.

Calculation of the Original Credit

The credit was calculated as 6% of the “purchase price” of the machinery or equipment. The statutory definition of purchase price included:

• the actual cost of the asset;
• the cost of installing the machinery or equipment.

Crucially, the purchase price specifically excluded any sales and use taxes imposed under Utah Code Chapter 12. This exclusion ensures that the state does not provide a tax credit on a tax payment. Furthermore, the credit was nonrefundable, meaning it could only reduce a taxpayer’s liability to zero and could not result in a cash payment from the state.

Feature	Legacy Machinery Credit (Code 13)	Modern R&D Credit (Code 12)
Calculation Base	Purchase Price + Installation	Incremental QREs + Basic Research + Volume
Credit Rate	6% of total investment	5% of increment; 7.5% of volume
Carryover	14 Years	14 Years (Incremental only)
Refundability	Nonrefundable	Nonrefundable
Current Status	Carryover Only (Sunset 2010)	Active and Permanent

Local Revenue Office Guidance and Administrative Application

The Utah State Tax Commission (USTC) provides comprehensive guidance on how to report and apply the Code 13 carryover through its annual instruction booklets for Form TC-40 (Individual) and Form TC-20 (Corporation). For practitioners, the primary administrative challenge is navigating the “Priority of Credits” established in Utah Administrative Code R865-6F-27.

Reporting Requirements for Code 13

Taxpayers utilizing a remaining carryover from the 1999–2010 period must report the amount on the appropriate supplemental schedule. For individuals, this is TC-40A, Part 4, using Code 13. For corporations, it is reported on TC-20, Schedule AC. The Commission mandates that all related documents, including original purchase invoices from the pre-2011 period, be kept with the taxpayer’s records to substantiate the carryover in the event of an audit.

The administrative guidance in Publication 14 (Utah Withholding Tax Guide) and Publication 25 (Sales and Use Tax General Information) provides additional context for the application of these rules. While Publication 14 focuses on the wages that might constitute qualified research expenses (QREs) for the modern Code 12 credit, it reinforces the state’s rigorous definitions of what constitutes “work done in Utah”. For the legacy machinery credit, the asset had to have a “Utah situs”—meaning it was physically located and used within state borders.

Administrative Rules and the Order of Application

Utah Administrative Rule R865-6F-27 dictates the sequence in which credits must be applied against the corporate franchise tax. This order is vital because it determines which credits might expire unused. The mandated order is:

1. Nonrefundable credits without a carryforward;
2. Nonrefundable credits with a carryforward (such as Code 13);
3. Refundable credits.

This hierarchy creates a strategic complexity for companies that also claim the modern 7.5% volume-based research credit (Code 12). Because the 7.5% volume credit has no carryforward provision, it must be used in the current year or it is lost. Therefore, a taxpayer must first exhaust their tax liability with the 7.5% volume credit before they can apply the legacy Code 13 carryover. If the current-year volume credit eliminates the tax liability entirely, the Code 13 carryover remains unused and its 14-year clock continues to run.

Contextualizing with the Modern Utah R&D Tax Credit (Code 12)

The modern Utah Research and Development Tax Credit, administered under Utah Code § 59-7-612 and § 59-10-1012, serves as the broader framework within which the legacy machinery carryover operates today. Most sophisticated taxpayers in Utah manage a portfolio of research credits that includes three distinct components under the Code 12 umbrella:

1. 5% Incremental Credit: 5% of qualified research expenses (QREs) that exceed a base amount.
2. 5% Basic Research Credit: 5% of payments to qualified organizations for basic research in Utah that exceed a base amount.
3. 7.5% Volume Credit: 7.5% of the total current-year Utah QREs.

The Role of Carryovers in Modern Law

The 14-year carryover period is a consistent feature across Utah’s research tax policy. Both the incremental and basic research components of Code 12 allow for a 14-year carryforward, mirroring the duration allowed for the legacy Code 13 machinery credit. However, the 7.5% volume-based component of Code 12 is unique in that it cannot be carried forward; it must be claimed in the taxable year for which the taxpayer incurs the expenses.

This creates a high-stakes environment for tax planning. A firm must carefully calculate its “Base Amount” to decide whether the 5% incremental credit or the 7.5% volume credit provides the most value. Under Utah law, the base amount is calculated using the taxpayer’s average gross receipts for the four taxable years preceding the credit year, multiplied by a “fixed-base percentage”. Utah follows the federal startup rules, allowing a 3% fixed-base percentage for the first five years of research, but importantly, Utah allows a taxpayer to irrevocably elect to be treated as a start-up company even if they do not meet the federal requirements for that status.

ASC Method Inclusion

A landmark administrative decision occurred in 2011 when the Utah State Tax Commission ruled that the Alternative Simplified Credit (ASC) method was not excluded from Utah’s credit calculation. This allows taxpayers to calculate their credits using 7.5% of qualified expenses over 50% of the average of the previous three years’ expenses. While this provides flexibility, it does not change the carryforward rules: the 7.5% “volume-like” components still face restrictions on carryovers compared to the 5% incremental “growth-based” components.

Deep Dive into Qualified Research Expenses (QREs) in Utah

Because the 14-year carryover of the machinery credit often overlaps with current-year QRE claims, understanding the definition of a QRE is essential. Utah largely mirrors the federal definition under IRC Section 41(b), with the significant caveat that all expenses must be incurred in Utah.

Wage, Supply, and Contract Research Components

The Utah State Tax Commission requires a strict nexus for all QRE components:

• Wages: Must be for employees performing, supervising, or directly supporting qualified research within the state of Utah.
• Supplies: Includes tangible property, other than land or improvements and depreciable property, that is used in the research process in Utah.
• Contract Research: Utah allows 65% of payments to unrelated third parties to be counted, provided the research is performed in the state. Payments to qualified research consortia (such as university-led groups) can be captured at 75%.

The Four-Part Test in Utah Jurisprudence

To qualify for either the legacy carryover or the modern credit, the activities associated with the equipment or expenses must satisfy the federal “Four-Part Test”:

1. Permitted Purpose: The activity must relate to a new or improved function, performance, reliability, or quality of a business component.
2. Elimination of Uncertainty: The research must be intended to discover information that would eliminate technical uncertainty regarding the development or improvement of a product or process.
3. Process of Experimentation: Substantially all of the activities must constitute a process of experimentation, involving trial and error, modeling, or simulation.
4. Technological in Nature: The process of experimentation must fundamentally rely on principles of physical science, biological science, engineering, or computer science.

Comprehensive Example: Multi-Year Application of Code 13 and Code 12

To illustrate the interaction between the legacy carryover and modern R&D credits, consider a hypothetical Utah-based semiconductor firm, “Wasatch Silicon Corp.”

Phase 1: The Legacy Investment (2010)

In 2010, the final year of the machinery credit, Wasatch Silicon purchased a sophisticated lithography machine and high-end servers for $10,000,000. They incurred $2,000,000 in installation costs.

• Qualified Investment: $12,000,000
• Legacy Credit (6%): $720,000

In 2010, the company had no tax liability. They began carrying forward the $720,000 credit, which would be valid through the 2024 taxable year.

Phase 2: Ongoing Research (2021-2023)

By 2021, the company was profitable and conducting new research.

• 2021 Utah Tax Liability: $200,000
• 2021 Modern R&D Credit (Code 12, 7.5% volume): $150,000
• 2021 Legacy Carryover (Code 13): $720,000 available

According to R865-6F-27, the company must use the 7.5% volume credit first because it has no carryover.

• Tax offset by Code 12 (Volume): $150,000
• Remaining Tax Liability: $50,000
• Tax offset by Code 13 Carryover: $50,000
• Remaining Code 13 Carryover to 2022: $670,000

Phase 3: Strategic Depletion (2024)

In 2024, the final year for the 2010 carryover, Wasatch Silicon had a significant tax bill of $800,000.

• 2024 Utah Tax Liability: $800,000
• 2024 Code 12 (Volume): $100,000
• Code 13 Carryover: $670,000

The company applies the $100,000 volume credit first, then the $670,000 legacy credit.

• Total Tax Paid: $30,000
• Code 13 Balance: $0 (Successfully exhausted)

If the company had $1,000,000 in Code 13 carryover instead of $670,000, the amount exceeding the $700,000 remaining liability ($300,000) would expire at the end of 2024 and could not be used in 2025.

Comparative Analysis of Carryover Periods in Utah Tax Law

Utah’s 14-year carryover for research credits is significantly longer than many other state credits, which typically range from 3 to 7 years. This reflects the high-risk, long-duration nature of the sectors Utah aims to attract.

Credit Name	Utah Code Section	Carryover Period
Research Activities (Incremental)	§ 59-7-612	14 Years
Machinery & Equipment (Legacy)	§ 59-7-613	14 Years
Renewable Energy Systems (RESTC)	§ 59-7-614	0 to 4 Years (depending on year)
Historic Preservation	§ 59-10-1006	5 Years
Veteran Employment	§ 59-10-1031	5 Years
Low-Income Housing	§ 59-7-607	Varies (often tied to federal)

The contrast between the 14-year research carryover and the 4-year renewable energy carryover highlights the state’s prioritization of R&D as a foundational economic driver.

Compliance and Audit Risks for Legacy Carryovers

Because the Code 13 carryover involves investments made over a decade ago, it presents unique audit risks. The Utah State Tax Commission may audit a current-year return and challenge the validity of a carryover generated in 2010.

Documentation and Record Retention

Taxpayers must maintain the “nexus” documentation for the life of the carryover. For a credit earned in 2010 and used in 2024, the record retention period effectively spans 14 years plus the statute of limitations on the 2024 return—potentially 17 to 20 years in total. Missing invoices or lack of proof that the machinery was used in Utah for the full 12-month period in 2010 can result in a full disallowance of the remaining carryover.

Unitary Group Challenges

For corporations filing as part of a unitary group, the credits are generally calculated on a separate-entity basis but can be used to offset the group’s combined Utah tax liability. However, if a member of the group that originally earned the machinery credit in 2010 is sold or leaves the unitary group, the credit may be “stranded” or subject to specific limitations under Utah Code § 59-7-110. The Commission’s rules in R865-6F-24 state that nexus for one member can create nexus for the group, but credit carryforwards of acquired corporations are limited by the acquired entity’s post-acquisition income.

Impact of Recent Legislative Reform (2023-2025)

The Utah tax system is currently undergoing a period of rate compression. Between 2022 and 2025, the income tax rate has been incrementally lowered from 4.95% to 4.5%.

Rate Compression and Credit Value

While lower rates reduce the overall tax burden, they mathematically slow the rate at which a nonrefundable credit carryover can be utilized. A corporation with $10,000,000 in Utah taxable income would have had a $495,000 tax liability at 4.95%, allowing them to use nearly half a million dollars of Code 13 carryover in a single year. At a 4.5% rate, that same corporation only has a $450,000 liability, extending the time required to “burn through” a large credit balance.

The 2023 Statutory Cleanup (HB 58)

House Bill 58, enacted in 2023, was a “General Law Amendments” bill that removed § 59-7-613 from the active code. This was primarily an administrative cleanup since no new machinery credits have been earned for over a decade. However, the State Tax Commission’s continued inclusion of “Code 13” in its 2024 and 2025 instructions (TC-40 and TC-20) confirms that the carryover rights of existing credit holders remain in effect.

Administrative Guidance for Pass-Through Entities

For S-corporations and Partnerships, the research credits—both modern and legacy—flow through to the individual partners or shareholders via Schedule K-1. The individual then reports their share of the credit on their TC-40A using either Code 12 or Code 13.

The Role of Form TC-20S

Pass-through entities must file Form TC-20S and include Schedule K-1s for all partners. The entity itself does not pay the tax (unless it elects the Pass-through Entity Tax or PTET option), but it is responsible for calculating the Utah-source QREs and identifying the machinery credit carryovers that are being passed through to the owners. The 2025 instructions clarify that the carryforward period for certain other credits (like the PTET credit) has been extended, but the 14-year period for research credits remains the gold standard for Utah incentives.

Detailed Analysis of “Qualified Machinery” and Installation Costs

A common area of dispute in Utah research tax law is the distinction between “machinery” and “general equipment.” The original 1999–2010 statute was broader than the current R&D supply definition but narrower than a general business asset definition.

Computer and Software Inclusions

The explicit inclusion of computer software as “equipment” in § 59-7-613(1)(b) was a forward-thinking move by the Utah Legislature. In most tax jurisdictions, software is treated as an intangible asset or a supply. By classifying it as equipment, Utah allowed for a 6% credit on the purchase price of high-end specialized research software, such as CAD (Computer-Aided Design) or simulation tools.

Installation Costs and LaTeX Calculations

The inclusion of installation costs in the “Purchase Price” was a significant benefit. For large-scale laboratory equipment, installation can involve seismic bracing, specialized electrical work, and cleanroom integration. The formula for the original credit generation was:

Credit_Legacy = 0.06 * (Cost_Asset + Cost_Installation)

Where:

• Cost_Asset = The invoice price of the qualified research machinery.
• Cost_Installation = The direct labor and materials required to make the asset operational in Utah.

If a machine cost $1,000,000 and required $500,000 in specialized installation, the Utah credit was $90,000, whereas in many other states, it would have been limited to 6% of the $1,000,000 machine alone.

Strategic Interaction with Federal R&D Credits

Utah’s research credits are “stacked” with the federal credit. While Utah follows the federal Section 41 definitions, it does not allow for the Alternative Incremental Credit (AIC) method, which was repealed federally but remains a historical reference point in some state laws.

The ASC Election in Utah

Since the 2011 ruling, Utah taxpayers can use the ASC method to calculate the modern Code 12 credit. This is often beneficial for companies with missing historical gross receipts data from the 1980s or 1990s, which is required for the “Regular” credit calculation. However, the election of the ASC method for Code 12 does not impact the Code 13 carryover, as the Code 13 credit was a “fixed” 6% of a historical purchase and does not require ongoing “base amount” calculations.

Federal/State QRE Disparity

Taxpayers must be careful not to simply “copy” their federal QREs to their Utah return. Federal QREs include research done in all 50 states, while Utah QREs must be strictly Utah-sourced. If a company has an R&D team in Provo and another in San Jose, only the Provo wages qualify for the Utah credit. This “Utah-only” rule applies to both the modern credit and the legacy machinery credit.

Administrative Procedures for Utah Tax Accounts

The Utah State Tax Commission manages all tax accounts through the Taxpayer Access Point (TAP) at tap.utah.gov.

TAP and Credit Monitoring

Businesses can use TAP to view their tax history and track their credit carryovers. However, the system is only as good as the data entered; it is the taxpayer’s responsibility to carry forward the Code 13 amount year-over-year on their supplemental schedules. If a taxpayer forgets to list the carryover on a return, they may need to file an amended return within the statute of limitations to “claim” the carryover for that year, though they cannot “revive” a credit that has passed its 14-year expiration date.

Closing and Reinstating Accounts

If a corporation dissolves or is reinstated, its tax credits may be impacted. Form TC-69C is used to report changes in business ownership or to close an account. Under Administrative Rule R865-6F-1, a corporation is liable for franchise tax until it legally terminates its right to do business in Utah, and its final return must be filed to clear any outstanding tax or credit balances.

Final Thoughts: The Final Lifecycle of the Machinery Carryover

The Carryover of Credit for Machinery and Equipment (Code 13) represents a vital link to Utah’s industrial history and a continuing benefit for its long-term innovators. As the final credits earned in 2010 approach their 2024 expiration, the technical mastery of the 14-year rule becomes essential. The state’s administrative framework—from the priority-of-application rules in R865-6F-27 to the rigorous Utah-nexus requirements for QREs—ensures that these incentives are targeted toward genuine, in-state innovation.

For the modern practitioner, the strategy is clear: exhaust the legacy Code 13 carryovers before they expire, but only after utilizing the “use-it-or-lose-it” 7.5% volume credits of the modern era. By maintaining impeccable records that span the two-decade lifecycle of these credits, Utah businesses can ensure they fully realize the value of their historical capital investments, continuing to offset their tax liabilities while they pioneer the next generation of technological breakthroughs in the Beehive State.