Does building and operating a new natural gas vehicle-fueling station count as a 'new business,' so the owner can get a refund of unused investment tax credit instead of just carrying it forward?

Plain-English summary

George Fox, a sole proprietor who had been self-employed since 1989 in farming, mortgage and life insurance sales, and investments, completed construction of a natural gas fueling station on June 1, 2006. The station draws uncompressed natural gas from the street main and compresses it into the onboard tanks of registered motor vehicles - both Fox's own vehicles and those of his customers. Fox planned to register as a vendor of alternative fuels and collect sales tax on the CNG he sold, and he would report the fueling station's income under the same federal employer identification number he had used for his other businesses, but on a separate Schedule C.

Fox asked the Department whether he was entitled to a refund of the investment tax credit (ITC) generated by the equipment used to build the station. Under Tax Law § 606(a), a taxpayer can claim an ITC for qualifying tangible personal property and structural components used in production activities such as manufacturing or farming. If the credit exceeds the taxpayer's tax liability for the year, the excess is normally carried forward for up to ten years - unless the taxpayer qualifies as the "owner of a new business," in which case the taxpayer may instead elect to receive the excess as a refund.

The Department assumed (without deciding) that the fueling station property otherwise qualified for the ITC, and focused solely on whether the fueling station operation counted as a "new business" under § 606(a)(10). A business is disqualified from new-business status if it is substantially similar in operation and ownership to a business entity the taxpayer already owns that is (or was) taxable under specified Tax Law articles, or if the taxpayer has run the new entity in New York for more than five taxable years. Because Fox's fueling operation - reported on its own Schedule C and unrelated to his farming, mortgage, insurance, or investment activities - was not substantially similar to his other businesses, the Department concluded it qualified as a new business.

As a result, the Department ruled that Fox was eligible to elect a refund, rather than a carryforward, of any excess ITC attributable to the fueling station, to the extent the credit exceeded his tax liability for the year.

What this means for you

Sole proprietors starting a distinct new line of business

If you already run one or more businesses and start an unrelated new venture - reported separately for federal income tax purposes and not substantially similar in operation or ownership to your existing businesses - that new venture can qualify as a "new business" under Tax Law § 606(a)(10). That status matters because it lets you elect a refund of any investment tax credit that exceeds your tax liability, instead of only being able to carry the excess forward.

Accountants and tax professionals

When a self-employed client adds a new, operationally distinct business activity, evaluate whether it is "substantially similar in operation and ownership" to the client's existing businesses under § 606(a)(10)(A), and whether the client has operated it in New York for more than five taxable years under § 606(a)(10)(B). If neither disqualifier applies, advise the client that they may elect a refund of excess ITC under § 606(a)(5) rather than defaulting to a ten-year carryforward.

Common questions

Q: Why did the fueling station qualify as a "new business" instead of just an extension of Fox's existing businesses?
A: Because it was not substantially similar in operation and ownership to his farming, mortgage, life insurance, or investment activities, and its income was reported on a separate Schedule C.

Q: What's the practical benefit of being treated as a "new business" for ITC purposes?
A: Instead of only being able to carry excess investment tax credit forward for up to ten years, the owner of a new business can elect to receive the excess credit as a refund under Tax Law § 606(a)(5).

Q: Does this opinion confirm that the fueling station equipment actually qualifies for the investment tax credit?
A: No. The Department expressly assumed, for purposes of the opinion, that the property met the ITC criteria; it ruled only on the separate "new business" question.

Q: What would disqualify a venture from "new business" status?
A: Under § 606(a)(10), a venture is disqualified if it is substantially similar in operation and ownership to a business entity the taxpayer already owns that is or was taxable under specified Tax Law articles, or if the taxpayer has operated the new entity in New York for more than five taxable years (excluding short years).

Citations and references

• Tax Law § 606(a)(1) - allows an investment tax credit against personal income tax for the cost basis of qualifying tangible property
• Tax Law § 606(a)(2)(A) - describes the depreciable, four-year-useful-life, New York-situs property that qualifies for the credit
• Tax Law § 606(a)(5) - permits an owner of a new business to elect a refund of excess ITC instead of a ten-year carryforward
• Tax Law § 606(a)(10) - defines "owner of a new business" and the conditions that disqualify a venture from that status

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2006.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a06_7i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-06(7)I
Income Tax
August 28, 2006

Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I060522A

On May 22, 2006, a Petition for Advisory Opinion was received from George Fox, 7
White Deer Ct., Huntington, New York 11743. Petitioner, George Fox, provided additional
information with respect to the Petition on July 11, 2006.
The issue raised by Petitioner is whether Petitioner is entitled to a refund of the
investment tax credit.
Petitioner submits the following facts as the basis for this Advisory Opinion.
On June 1, 2006, Petitioner completed the construction of a natural gas fueling station for
fueling motor vehicles. The station will take uncompressed natural gas from the main in the
street and compress it into onboard tanks in registered motor vehicles for use on the roads of
New York State. The station is owned by Petitioner and will be operated to fuel vehicles owned
by Petitioner as well as vehicles owned by Petitioner’s customers. Petitioner has not previously
been involved in the sale of compressed natural gas (CNG) for use by customers in motor
vehicles. As a retail vendor of motor fuel, Petitioner plans to register with the applicable
authorities as a vendor of alternative fuels (e.g., Petitioner anticipates registering for sales and
use tax purposes and collecting the applicable sales tax on its sales of the CNG). Petitioner’s
income from fuel sales will be reported under the same employer identification number that he
has used for all other business activities since 1989. Petitioner has been self-employed since
1989 and is currently involved in several businesses, including farming, mortgage and life
insurance sales, and investments. However, the proceeds from the natural gas fueling station
operation will be reported for federal personal income tax purposes on a separate Schedule C.
Applicable law and regulations
Section 606(a) of the Tax Law provides, in part:
Investment tax credit (ITC). (1) A taxpayer shall be allowed a credit, to be
computed as hereinafter provided, against the tax imposed by this article. The amount of
the credit shall be the per cent provided for hereinbelow of the investment credit base.
The investment credit base is the cost or other basis, for federal income tax purposes, of
tangible personal property and other tangible property, including buildings and structural
components of buildings, described in paragraph two of this subsection, less the amount
of the nonqualified nonrecourse financing with respect to such property to the extent such
financing would be excludible from the credit base pursuant to section 46(c)(8) of the
internal revenue code. . . .

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TSB-A-06(7)I
Income Tax
August 28, 2006
(2)(A) A credit shall be allowed under this subsection with respect to tangible
personal property and other tangible property, including buildings and structural
components of buildings, which are: depreciable pursuant to section one hundred sixty­
seven of the internal revenue code, have a useful life of four years or more, are acquired
by purchase as defined in section one hundred seventy-nine (d) of the internal revenue
code, have a situs in this state and are (i) principally used by the taxpayer in the
production of goods by manufacturing, processing, assembling, refining, mining,
extracting, farming, agriculture, horticulture, floriculture, viticulture or commercial
fishing…. For purposes of this subsection, the term "goods" shall not include electricity.
*

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*

(5) If the amount of credit allowable under this subsection for any taxable year
shall exceed the taxpayer's tax for such year, the excess allowed for a taxable year
commencing … on or after January first, nineteen hundred eighty-seven and not
deductible in such year may be carried over to the ten taxable years next following such
taxable year and may be deducted from the taxpayer’s tax for such year or years. In lieu
of carrying over any excess, a taxpayer who qualifies as an owner of a new business for
purposes of paragraph ten of this subsection may, at his option, receive such excess as a
refund. Any refund paid pursuant to this paragraph shall be deemed to be a refund of an
overpayment of tax as provided in section six hundred eighty-six of this article, provided,
however, that no interest shall be paid thereon.
*

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(10) For purposes of paragraph five of this subsection, an individual who is either
a sole proprietor or a member of a partnership shall qualify as an owner of a new business
unless:
(A) the business of which the individual is an owner is substantially similar in
operation and in ownership to a business entity taxable, or previously taxable, under
section one hundred eighty-three, one hundred eighty-four, one hundred eighty-five or
one hundred eighty-six of article nine; article nine-A, thirty-two or thirty-three of this
chapter; article twenty-three of this chapter or which would have been subject to tax
under such article twenty-three (as such article was in effect on January first, nineteen
hundred eighty) or the income (or losses) of which is (or was) includable under article
twenty-two of this chapter whereby the intent and purpose of this paragraph and
paragraph five of this subsection with respect to refunding of credit to new business
would be evaded; or
(B) the individual has operated such new business entity in this state for more
than five taxable years (excluding short years of the business).

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TSB-A-06(7)I
Income Tax
August 28, 2006
Opinion
Petitioner completed construction of a natural gas fueling station on June 1, 2006. The
station will take uncompressed natural gas from the main in the street and compress it into
onboard tanks in registered motor vehicles for use on the roads of New York State.
Section 606(a) of the Tax Law allows a taxpayer to claim an investment tax credit (ITC)
against his or her personal income tax for purchases of certain new or used tangible personal
property or other tangible property, including buildings and structural components of buildings.
If the allowable amount of the ITC exceeds the taxpayer’s tax for the year, the excess amount
may be carried over to the 10 taxable years next following such taxable year and may be
deducted from the taxpayer’s tax for such year or years. However, in lieu of a credit carryover, a
taxpayer who qualifies as an owner of a new business may elect to treat an ITC credit carryover
as a refundable overpayment. For personal income tax purposes, an owner of a new business is
defined as a sole proprietor or a partner of a partnership, unless the business which the taxpayer
owns is substantially similar in operation and in ownership to a business entity taxable, or
previously taxable, under Article 9-A; Article 32; Article 33; section 183, 184, 185 or 186 of
Article 9; Article 22; or Article 23 or the taxpayer has operated the new business entity in
New York State for more than five taxable years, excluding short tax years.
For purposes of this Advisory Opinion, it is assumed that the property purchased by
Petitioner for the construction of the fueling station meets the criteria to qualify for the ITC. The
issue raised is whether Petitioner’s operation of the fueling station qualifies Petitioner as an
owner of a new business for purposes of the ITC. Petitioner states that the proceeds from the
natural gas fueling station operation will be reported for federal income tax purposes on a
separate Schedule C. Petitioner's operation of the fueling station does not appear to be
substantially similar to Petitioner's other business operations described in this Opinion. It
appears, therefore, that Petitioner’s business that takes uncompressed natural gas from the main
in the street and compresses it into onboard tanks in motor vehicles is not substantially similar in
operation and ownership to a business entity which the taxpayer owns that is currently taxable or
previously taxable, as provided by section 606(a)(10)(A) of the Tax Law.
Accordingly, based on the facts submitted, it appears that Petitioner’s natural gas fueling
station operation will be considered a new business for purposes of section 606(a)(10) and,
therefore, pursuant to section 606(a)(5)of the Tax Law, Petitioner is eligible for a refund of the
excess ITC if the credit exceeds Petitioner’s tax.

DATED: August 28, 2006

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.