If a company builds an entire dedicated research-and-development building -- including labs, offices for researchers and managers, flexible 'shell space' for future expansion, and support/mechanical space -- does the WHOLE building qualify for New York's 10% research and development credit, or only the portions used directly for lab work?

Plain-English summary

Bausch & Lomb Incorporated planned to build a new 98,500-square-foot research and development facility adjacent to its Rochester, New York manufacturing/office building, to house R&D for its solutions, ophthalmic, pharmaceutical, and contact lens businesses. The building was broken into laboratory space (34,000 sq. ft. -- microbiological, analytical, polymer, and chemical research, plus formulation development), office space (14,000 sq. ft., subdivided among lab technicians, professional researchers, and managers), "shell space" (10,000 sq. ft. reserved for future research-group expansion, adaptable as needs change), and support/non-assignable space (40,500 sq. ft. -- mechanical/electrical rooms ventilating the labs, chemical storage under refrigeration, "interaction space" designed to encourage researcher collaboration, and general circulation like elevators and corridors). Bausch & Lomb argued the facility was a "special purpose structure" -- specifically engineered for research demands and not economically convertible to other uses -- and that since its SOLE purpose was research, the entire building's cost should qualify for New York's 10% research and development credit under section 210.18.

The Department agreed, component by component, ultimately finding the entire facility qualifies: (1) ALL laboratory space qualifies outright; (2) office space for technicians and professionals qualifies because reviewing test results, using lab computer terminals, and preparing R&D reports is "a direct and necessary part of the research process," and managers' offices qualify because they're used SOLELY for administering R&D (planning, staffing, budgeting); (3) the shell space qualifies based on Bausch & Lomb's demonstrated intent to use it for R&D expansion -- but flagged for future RECAPTURE if it's ever repurposed for something else; and (4) support/non-assignable space qualifies to the same extent the rest of the building does (100% here) -- ventilation equipment because it creates the necessary research environment, chemical storage because it stores research materials, and interaction/circulation space because it supports the qualifying research activity throughout. Because the ENTIRE facility qualified, the Department didn't need to address the second question raised (how to allocate costs between qualifying and non-qualifying portions) at all. Notably, "non-building items such as movable lab equipment" (the kind of freestanding equipment addressed in the later, similar Enzo Biochem ruling, TSB-A-86(19)C) are explicitly carved OUT of this ruling -- to be reviewed separately, with the Department taking no position on their eligibility here.

Finally, the Department flagged that because Bausch & Lomb's R&D property also independently qualifies as manufacturing-type property, section 210.12(f) lets it ELECT to treat the R&D facility as investment-tax-credit property instead -- claiming the 6% investment tax credit (plus the follow-on employment incentive credit under section 210.12-A if headcount grows) IN LIEU OF the 10% R&D credit, though not both (section 210.18(c) makes the two credits mutually exclusive for the same property).

What this means for you

Companies building dedicated research facilities

A building doesn't need to be 100% laboratory space to fully qualify for the R&D credit -- offices used by researchers and by managers dedicated solely to administering R&D, future-expansion "shell space," and supporting mechanical/circulation space can ALL qualify if the whole facility is genuinely and demonstrably dedicated to research. Document the intended research use of every component, especially flexible or support space, since unqualified shell space is subject to future recapture if repurposed.

Choosing between the R&D credit and the investment tax credit for a large capital project

For a big-ticket facility, run the numbers both ways: the 10% R&D credit under section 210.18 versus the 6% investment tax credit (plus a possible 3-year employment incentive credit worth up to another 9%) under the section 210.12(f) election -- they're mutually exclusive for the same property, so the choice matters and must be made in the year you first qualify.

Common questions

Q: Does office space for researchers count toward the R&D credit, or only actual lab space?
A: Office space used by lab technicians and professional researchers qualifies, since it's "a direct and necessary part of the research process" -- and dedicated R&D managers' offices qualify too.

Q: What happens if "shell space" reserved for future R&D expansion later gets used for something else?
A: The credit allowed for that space must be recaptured if it's later determined to be used for non-R&D purposes.

Q: Does this ruling decide whether movable lab equipment (not part of the building) qualifies for the credit?
A: No -- the Department expressly stated such non-building items are reviewed separately and took no position on their eligibility in this opinion.

Q: Can another company rely on this specific ruling?
A: No. It binds the Department only for this petitioner's specific facility and facts, and can't be relied upon by other companies building R&D facilities, even similarly purpose-built ones.

Citations and references

Statutes and regulations:

• Tax Law § 210.18, § 210.18(c)
• Tax Law § 210.12, § 210.12(b), § 210.12(f)
• Tax Law § 210.12-A(a)
• Tax Law § 210.3(e)

Related rulings:

• TSB-A-86(19)C -- the later Enzo Biochem ruling addressing R&D vs. investment tax credit eligibility for the movable lab/production EQUIPMENT this ruling explicitly excludes

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a86_12c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86 (12) C
Corporation Tax
June 17, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO.C860429A

On April 29, 1986, a Petition for Advisory Opinion was received from Bausch & Lomb
Incorporated, One Lincoln First Square, Rochester, New York 14604.
The issues raised are (I) the extent to which tangible property, including buildings and
structural components of buildings, qualifies for the research and development credit provided by
section 210.18 of the Tax Law and (II) if the entire facility does not qualify, what is the proper
method of allocating construction costs to specific qualifying property.
The petitioner is developing plans to construct a new research and development facility
adjacent to its present manufacturing/office building located at 1400 North Goodman St., Rochester,
New York. This state of the art technical center will house the research and development activities
of the company's solutions, ophthalmic, pharmaceutical and contact lens businesses. The building
will be used to conduct research and for product and process development.
The total area of new construction for the proposed facility is 98,500 square feet, identified
as follows:
Laboratories
Offices
Shell Space
Support and Non-Assignable

34,000 Sq. Ft.
14,000 Sq. Ft.
10,000 Sq. Ft.
40,500 Sq. Ft.
98,500

The various components are to be used as follows:
Laboratory Space
The laboratory space will encompass the following types of functions:
-

Microbiological Research
Analytical Research
Polymer Synthesis
Chemical Research
Formulation Development (Pre-manufacturing simulation
with clean rooms and stability testing)

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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June 17, 1986
Office Space
The 14,000 square feet of office space will be subdivided by class of research and
development personnel as follows:
Lab Technicians
Professionals
Managers

2,200 Sq. Ft.
9,400 Sq. Ft.
2,400 Sq. Ft.

Laboratory cubicles for technicians are strategically located adjacent to the labs, but
in widened corridor space. Technicians will use these cubicles to review results of
laboratory tests, to access personal computer terminals in connection with tests being
performed, and to compile data and prepare R & D reports. Professionals will use
their offices to develop and monitor specific lab procedures, which, in most cases,
will be conducted by technicians. The managers will be dealing with administrative
matters exclusively relating to research and development such as planning, staffing
and budgetary constraints.
Shell Space
Due to the potential for unforeseen changes in research and development procedures,
shell space has been included in the current construction plans. As individual
research groups expand, the shell space will be converted to usable space. This shell
space not only includes future lab space, but also private offices and cubicles to
support anticipated growth. As industry trends change and new product ventures
arise, laboratories must respond to these challenges. Adaptability is a mandatory
feature of this building due to the generic nature of the planning module and systems
design.
Support and Non-Assignable Space
Support and non-assignable space includes:
-

Mechanical and electrical equipment rooms which provide ventilation
to the laboratories.

-

Storage space which includes the storing of chemicals under
refrigeration.

-

Interaction space. Departmental interaction was a key issue in
planning the proposed facility. The desire to create this interaction
and encourage the sharing of thoughts and ideas between researchers
was an influencing parameter in the design of the building.

-

Function support space. Includes vertical transportation (elevators,
stairs) and general building circulation (corridors, etc).

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TSB-A-86 (12) C
Corporation Tax
June 17, 1986
Petitioner states that the proposed facility is similar to a "special purpose structure" as defined
in the Federal investment tax credit regulations in so far as the structure which houses the research
function is actually an integral part of the research activity. This building is closely related to the
actual use of the property due to the fact that:
-

The structure has been specifically designed to provide for the stress
and other demands of the research and development testing, and

-

The structure could not be economically used for other purposes.
Conversion of the property to an alternative use would not be cost
beneficial.

Petitioner also states that since the sole purpose of constructing this facility was to conduct
research, and the entire structure will serve to support research, the total cost of the building should
qualify for the credit. Due to the nature of construction costs, the petitioner intends to aggregate the
components of the capitalized building costs such as the building shell, sitework, chilled water plant,
construction fees, construction assessments and architectural and engineering fees. The resulting
total cost figure will agree with the federal income tax basis of the property and will also serve as
the total new building cost subject to the research and development credit. Non-building items such
as movable lab equipment will be reviewed separately to determine whether they are subject to the
research and development credit. Nothing in this Advisory Opinion is intended to indicate whether
such non-building items are eligible for the research and development credit.
This facility will be constructed by Petitioner after June 30, 1982; it will be recovery property
with respect to which an accelerated cost recovery system deduction is allowable under section 168
of the Internal Revenue Code; it will have a useful life of more than four years; it will be acquired
by purchase as defined in section 179(d) of the Internal Revenue Code and will have a situs in New
York State.
Section 210.18 of Article 9-A of the Tax Law provides that a taxpayer shall be allowed a
credit against the tax imposed by Article 9-A at the rate of 10% of the cost or other basis of tangible
personal property and other tangible property, including buildings and structural components of
buildings, which:
(1)

are acquired, constructed, reconstructed or erected by the taxpayer after June 30,
1982;

(2)

are depreciable pursuant to section 167 of the Internal Revenue Code or is recovery
property with respect to which an accelerated cost recovery system deduction is
allowable under section 168 of the Internal Revenue Code;

(3)

have a useful life of four years or more;

(4)

are acquired by purchase as defined in section 179(d) of the Internal Revenue Code;

(5)

have a situs in New York State; and

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TSB-A-86 (12) C
Corporation Tax
June 17, 1986
(6)

are used or are to be used by the taxpayer for the purpose of research and
development in the experimental or laboratory sense.
The term "research and development in the experimental or laboratory sense" does not include:
(1)

the ordinary testing or inspection of materials or products for quality control;

(2)

efficiency surveys;

(3)

management studies;

(4)

consumer surveys;

(5)

advertising;

(6)

promotions; or

(7)

research in connection with literary, historical or similar projects.
ISSUE I

Petitioner's research and development facility, including the building and structural
components thereof, qualify for the research and development credit to the extent used for research
and development in the experimental or laboratory sense. The specific components of Petitioner's
facility qualify as property used in research and development as follows:
(1)

Laboratory Space - All of the laboratory space qualifies.

(2)

Office Space - All of the office space for the lab technicians and professionals
qualifies since such use of office space is a direct and necessary part of the
research process. The managers' office space qualifies since it is used solely
for managing research and development matters and, therefore, is deemed to
be an integral part of the research process.

(3)

Shell Space - Section 210.18 allows a credit for "buildings and structural
components of buildings which are used or are to be used by the taxpayer for
the purpose of research and development...." Based upon the facts presented
by Petitioner, it has been adequately demonstrated that the shell space is to
be used for research and development and, as such, will qualify. However,
if in the future it is determined that this space is used for purposes other than
research and development, a portion of the credit allowed for this space must
be recaptured.

(4)

Support and Non-Assignable Space - (a) The mechanical and electrical
equipment rooms which provide ventilation to the laboratories qualify since

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Corporation Tax
June 17, 1986
they create the environment necessary for research to be conducted. (b)
Since all of the storage space is used to store research and development
materials, the entire space qualifies. (c) The interaction space and the
function support space qualify to the extent the rest of the building qualifies.
That is, since 100% of the remainder of the building qualifies, all of the inter­
action space and the function support space qualify.
ISSUE II
Inasmuch as the entire facility is deemed to be used in research and development, no
allocation of costs is necessary. Accordingly, this issue need not be addressed in this Advisory
Opinion.
It should be noted that section 210.18(c) of the Tax Law states, in part, that the research and
development credit is not allowed if an investment tax credit is claimed pursuant to section 210.12
of the Tax Law.
Section 210.12(f) of the Tax Law provides that:
"(f) At the option of the taxpayer,...research and development facilities
which qualify for elective deduction under subparagraphs two and three of paragraph
(e) of subdivision three of this section may be treated as property 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, provided the property otherwise qualifies under paragraph (b)
of this subdivision, in which event, a deduction shall not be allowed under such
paragraph (g), a credit shall not be allowed under such subdivision eleven and a
deduction shall not be allowed under such paragraph three of paragraph (e)."
In addition, section 210.12-A(a) of the Tax Law provides for an employment incentive tax
credit and states, in part:
"(a) Where a taxpayer is allowed a credit under subdivision twelve, with
respect to property, the acquisition, construction, reconstruction or erection of which
commenced on or after the first day of January, nineteen hundred seventy-six, the
taxpayer shall be allowed a credit for each of the three years next succeeding the
taxable year for which the credit under subdivision twelve is allowed with respect to
such property, whether or not deductible in such taxable year or in subsequent taxable
years pursuant to paragraph (e) of such subdivision twelve, of fifty per cent of the
credit allowed under subdivision twelve; provided, however, that the credit allowable
under this subdivision for any taxable year shall only be allowed if the average
number of employees during such taxable year is at least one hundred one percent of
the average number of employees during the taxable year immediately preceding the
taxable year for which the credit under subdivision twelve is allowed. . . ."

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Accordingly, since the property in question qualifies for the research and
development deduction of section 210.3(e) of the Tax Law, it may be treated as property
principally used by Petitioner in the production of goods by manufacturing. Since the
property otherwise qualifies under section 210.12(b) of the Tax Law, Petitioner may elect,
pursuant to section 210.12(f) of the Tax Law, to claim the investment tax credit in lieu of the
research and development credit allowable pursuant to section 210.18 of the Tax Law. If
Petitioner elects to claim the investment tax credit and in succeeding taxable years qualifies,
pursuant to section 210.12-A of the Tax Law, for the employment incentive tax credit, such
credit may also be claimed for the appropriate taxable years.

DATED: June 17, 1986

s/Frank J. Puccia
Director
Technical Services Bureau

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