Administrative Rules of the State of Montana

BEFORE THE DEPARTMENT OF REVENUE

OF THE STATE OF MONTANA

In the matter of the adoption of New Rules I and II, the amendment of ARM 42.4.104, 42.4.201, 42.4.202, 42.4.208, 42.4.209, 42.4.303, 42.4.402, 42.4.1608, 42.4.1702, 42.4.2403, 42.4.2404, 42.4.2704, 42.4.2706, 42.4.2802, 42.4.2905, 42.4.3003, 42.4.3103, 42.4.3202, 42.4.3303, 42.4.4106, and 42.4.4107, and the repeal of 42.4.2707 relating to tax credits

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NOTICE OF PUBLIC HEARING ON PROPOSED ADOPTION, AMENDMENT, AND REPEAL

TO: All Concerned Persons

1. On December 17, 2012, at 9 a.m., a public hearing will be held in the Third Floor Reception Area Conference Room of the Sam W. Mitchell Building, in Helena, Montana, to consider the adoption, amendment, and repeal of the above-stated rules.

Individuals planning to attend the hearing shall enter the building through the east doors of the Sam W. Mitchell Building, 125 North Roberts, Helena, Montana.

2. The Department of Revenue will make reasonable accommodations for persons with disabilities who wish to participate in this public hearing or need an alternative accessible format of this notice. If you require an accommodation, contact the Department of Revenue no later than 5 p.m., December 3, 2012, to advise us of the nature of the accommodation that you need. Please contact Cleo Anderson, Department of Revenue, Director's Office, P.O. Box 7701, Helena, Montana 59604-7701; telephone (406) 444-5828; fax (406) 444-4375; or e-mail [email protected].

3. The proposed new rules do not replace or modify any section currently found in the Administrative Rules of Montana. The proposed new rules provide as follows:

NEW RULE I DEFINITIONS The following definitions apply to this subchapter:

(1) "Eligible employee" means an employee who works at least 20 hours a week but does not work for the business as a temporary or seasonal employee.

(2) "Seasonal employee" means an employee whose length of employment is expected to and actually lasts 120 days or fewer during the year. An employee would not be considered seasonal if they were not employed by the business for 120 days for reasons such as retirement or layoff. Examples of seasonal employees include extra retail clerks hired exclusively for holiday seasons and food and beverage workers hired for the summer tourist season.

AUTH: 15-1-201, 15-31-150, MCA

IMP: 15-31-132, MCA

REASONABLE NECESSITY: The department proposes to adopt New Rule I to define terms used in proposed New Rule II.

NEW RULE II DETERMINING NUMBER OF EMPLOYEES (1) In determining whether an employer has met the requirement in 15-31-132, MCA, that they have employed 20 or fewer employees working at least 20 hours a week, the following calculation will apply:

(a) add the total hours worked and hours for which payment is made or due for reasons such as sick leave, vacation, or paid holiday by all eligible employees but do not include more than 2,080 hours for an employee;

(b) divide the total hours by 2,080; and

AUTH: 15-1-201, 15-31-150, MCA

IMP: 15-30-2367, 15-31-132, 33-1-207, MCA

REASONABLE NECESSITY: The department proposes to adopt New Rule II in response to inquiries from businesses and tax return preparers. The Health Insurance for Uninsured Montanans tax credit is available to businesses that employ 20 or fewer employees, who each work at least 20 hours a week. Questions have arisen about how to determine whether a business has exceeded 20 employees due to factors such as seasonal employees and turnover. The calculation outlined by the proposed rule follows the calculation concept used for the federal Small Business Health Insurance credit to determine the number of employees of a business. The proposed Montana calculation provides fewer specifics because the provisions of the federal credit require a more accurate calculation of the number of employees and has a phase out provision.

4. The rules proposed to be amended provide as follows, stricken matter interlined, new matter underlined:

42.4.104 ENERGY GENERATING SYSTEMS (1) Various tax benefits are allowed for investments in "recognized nonfossil forms of energy generation." The term "recognized nonfossil forms of energy generation" is defined in 15-32-102, MCA, and ARM 42.4.110. The term does not include commercial ~~or net metering~~ systems, which may be eligible for a separate credit as described in subchapter 41 of this chapter. In this rule, the term "alternative energy generating systems" is used generically to describe all of the recognized nonfossil forms of energy generation listed in ARM 42.4.110.

(2) The tax benefits for installing an alternative energy generating system are:

(a) a credit against their individual income tax liability to resident individuals who install the generating system to provide ~~heat~~ energy for their principal dwelling (equal to the cost of the system, including installation costs, less grants received, not to exceed $500) as provided in 15-32-201, MCA;

(b) if the system uses a "low emission wood or biomass combustion device" as defined in 15-32-102, MCA, and ARM 42.4.110, that a resident individual installs to provide heat for their principal dwelling, a credit against their individual income tax equal to the cost of the system, including installation, not to exceed $500, as provided in 15-32-201, MCA;

(c) if the energy generating system is a geothermal system that transfers energy from the ground by way of a closed loop or from ground water by way of an open loop that a resident individual installs in their principal dwelling to heat or cool the dwelling, a credit against their individual income tax equal to a portion of the installation costs of the system, not to exceed $1,500, as provided in 15-32-115, MCA;

(d) if the energy generating system is a geothermal system described in ~~subsection~~ (2)(c), that is installed by a builder constructing a new residence to heat or cool the dwelling, a credit against the builder's individual or corporation license tax liability, as applicable, equal to a portion of the installation costs of the system, not to exceed $1,500, as provided in 15-32-115, MCA;

(e) a property tax exemption for a portion of the appraised value of a capital investment in the alternative energy generating system for ten years after installation, as described in 15-6-224, MCA, and ARM 42.19.1104 (the system may be installed in a residential dwelling or a commercial structure); and

(f) a property tax exemption for machinery and equipment used in qualifying small electric generating systems that are powered by an alternative renewable energy source, as described in 15-6-225, MCA, and ARM 42.4.4105.

(3) A taxpayer "completes installation of an energy system using a recognized nonfossil form of energy generation" as outlined in 15-32-201, MCA, when the following components of a system have been installed and placed in service:

(a) a source of alternative energy production, such as:

(i) solar photovoltaic modules;

(ii) solar thermal collectors;

(iii) a wind turbine;

(iv) a hydropower turbine; or

(v) a geothermal ground loop;

(b) a point of interconnection to the dwelling's electrical, heating, or hot water system; and

(c) if the source of alternative energy production does not produce energy in a usable form, a means of converting energy to a usable form, such as:

(i) for electrical energy systems, an inverter; or

(ii) for thermal energy systems, a heat exchanger.

(4) The cost for repair or replacement of a component installed in an existing system is not eligible for the credit regardless of whether the repair or replacement changes the output of the energy system.

(5) The cost of additional components installed to expand the output of an existing system is eligible for the credit provided that the additional components do not repair or replace any portion of the existing system.

(3) through (5) remain the same, but are renumbered (6) through (8).

~~(6)~~(9) The credits against individual income tax liability described in (2)(a) and (2)(b) are claimed on ~~form~~ Form ENRG-B, Alternative Energy System Credit. The credits for the geothermal systems described in (2)(c) and (2)(d) are claimed on ~~form~~ Form ENRG-A, Geothermal System Credit.

AUTH: 15-1-201, 15-32-105, 15-32-203, MCA

IMP: 15-6-224, 15-6-225, 15-32-102, 15-32-105, 15-32-115, 15-32-201, 15-32-202, MCA

REASONABLE NECESSITY: The department proposes to amend ARM 42.4.104 to provide additional information that will help individuals better determine if their investment will qualify for the Alternative Energy Systems credit.

First, the department proposes removing the term "net-metering" as its use in the rule may lead some to believe that the system they installed will not qualify for the credit simply because net-metering was part of the system.

Second, the department proposes changing the word "heat" to "energy" in (2)(a) because using the term "heat" creates an unreasonably restrictive requirement. Systems using wind turbines or photovoltaic cells generate energy and cannot directly generate heat. Restricting the credit to systems that create heat creates an inequity.

Third, questions have arisen about when an individual has completed installation of an alternative energy system and the eligibility of certain components for the credit. The proposed amendments explain when that has occurred and further explain that replacing parts or repairing an existing system do not qualify for the credit. However, additional components installed to expand the output of an existing system are eligible for the credit. Such additional components will be considered "an energy system" for purposes of the credit.

Finally, in accordance with 2-4-314, MCA, the department conducted a biennial review of all its administrative rules. As a result of that review, the department is proposing to amend ARM 42.4.104 to make capitalization revisions.

42.4.201 DEFINITIONS The following definitions apply to this subchapter:

(1) through (3) remain the same.

(4) "Dwelling" means a building or unit that is habitually occupied as a residence. It does not include a guest house or vacation home that is occupied only occasionally. It does include a guest house or vacation home if they are usually occupied as someone's residence.

(5) through (18) remain the same but are renumbered (4) through (17).

(19) "SHGC" refers to the solar heat gain coefficient, and is a measure of how well a window blocks heat from sunlight. The SHGC is the fraction of the heat from the sun that enters through a window.

(20) remains the same, but is renumbered (18).

AUTH: 15-1-201, 15-32-105, MCA

IMP: 15-32-105, 15-32-109, MCA

Reasonable NECESSITY: The department proposes to amend ARM 42.4.201 to remove the definition of the terms "dwelling" and "SHGC."

The department proposes removing the definition of "dwelling" from subchapter 2 because it is not consistent with requirements for the credit for energy-conserving expenditures provided for in 15-32-109, MCA. While a credit may not be allowed for capital investment in a building or other structure whose energy consumption is negligible because the investment is considered "impractical or ineffective" under 15-32-106, MCA, the definition is vague and too restrictive. The term more appropriately applies to the credit for Alternative Energy Systems provided for in 15-32-201, MCA, and a definition for "principal dwelling" can be found in ARM 42.4.110.

Also, based on a recommendation from the Department of Environmental Quality, the department is proposing to amend ARM 42.4.209 to remove the requirement that doors, windows, and skylights meet a minimum SHGC rating. As a result, the term "SHGC" will no longer be used in subchapter 2 and, therefore, does not need to remain in this definitions rule.

42.4.202 INDIVIDUAL INCOME TAX CREDIT FOR ENERGY CONSERVING EXPENDITURES (1) A credit against individual income tax for energy-conserving expenditures provided in 15-32-109, MCA, is claimed by filing an Individual Income Tax Return with Form ENRG-C. The credit is not allowed unless the return and ~~form~~ Form ENRG-C, providing the information prescribed in the form, are filed with the Department of Revenue,. A return claiming the credit may be filed electronically even if the software used does not include an electronic version of the form. The individual should complete a copy of the form and keep it and all supporting documents with the other tax records for that year. If the department wishes to verify the credit, the individual shall, upon request, provide a copy of the form and all supporting information. The return, Form ENRG-C and supporting information can also be mailed to: P.O. Box 5805, Helena, Montana 59604-5805.

AUTH: 15-1-201, MCA

IMP: 15-32-106, 15-32-109, MCA

Reasonable Necessity: The department proposes to amend ARM 42.4.202 to inform taxpayers that they can still take advantage of the benefits of filing their return electronically while also claiming the credit for energy-conserving expenditures.

42.4.208 ANNUAL UPDATE OF CAPITAL INVESTMENTS QUALIFYING FOR THE ENERGY CONSERVATION CREDIT (1) and (2) remain the same.

(3) The following standards for items that do not qualify for the credit will be applied in the annual review of capital investments. The examples under each standard are provided to aid the public in understanding the type of items that do not qualify for the credit.

(a) Components of conventional buildings will typically not qualify for the energy conservation credit. Examples of such components that do not qualify for the credit include:

(i) carpeting, carpet padding, or other flooring of any type;

(ii) paint;

(iii) roof vents;

(iv) awnings that are not a component of a qualified "passive solar system";

(v) garage doors, whether insulated or not, that are installed in an existing or new building that does not consume any energy other than for lighting and the operation of items such as appliances or power tools; or

(vi) any item with an R-value of less than 1.

(b) Expenditures for maintenance and repairs to a building do not qualify for the credit. Examples of such expenditures include:

(i) patching holes;

(ii) replacing a foundation;

(iii) replacing siding;

(iv) replacing or reshingling a roof; or

(v) replacing existing asbestos insulation around heating pipes with other insulation.

(i) space heaters;

(ii) portable air conditioners;

(iii) appliances such as ovens, stoves, refrigerators, dishwashers, clothes washers, and dryers that are not attached fixtures are not capital expenditures, and therefore do not qualify for the credit.

(d) Any item that requires periodic human action, whether on a regular or irregular basis, to achieve energy savings, does not qualify for the credit. Examples of such items include:

(i) nonprogrammable thermostats;

(ii) moveable shades;

(iii) decks; and

(iv) outdoor grills installed as fixtures to the real estate.

AUTH: 15-1-201, 15-32-105, MCA

IMP: 15-32-102, 15-32-105, 15-32-106, 15-32-109, MCA

Reasonable Necessity: The department proposes to amend ARM 42.4.208 to enhance the example of a nonqualifying investment involving garage doors. The additional description reinforces the main point of the example that installing tighter doors or adding insulation to an unheated structure adds little to its overall energy efficiency; therefore the investment would not qualify for the credit.

42.4.209 STANDARDS AND RATINGS (1) For investments in products installed on or after July 1, 2010, the following applicable specification must be met or exceeded to qualify for the credit:

(a) Exterior windows and skylights-U factor ~~and SHGC~~ less than or equal to 0.30;

(b) Storm windows-U factor ~~and SHGC~~ less than or equal to 0.30 when measured in combination with the exterior window over which it is installed;

(d) Storm doors-U factor ~~and SHGC~~ less than or equal to 0.30 when measured in combination with the exterior window over which it is installed;

(e) Split system central air conditioning-EER greater than or equal to 13 and SEER greater than or equal to 16;

(f) Package system central air conditioning-EER greater than or equal to 12 and SEER greater than or equal to 14;

(g) Split system air source heat pumps-HSPF greater than or equal to 8.5, EER greater than or equal to 12.5 and SEER greater than or equal to 15;

(h) Package system air source heat pumps-HSPF greater than or equal to 8, EER greater than or equal to 12.5 and SEER greater than or equal to 14;

(i) Natural gas or propane furnace-AFUE greater than or equal to 95;

(j) Oil furnace-AFUE greater than or equal to 90;

(k) Hot water boiler-AFUE greater than or equal to 90;

(l) Advanced main air circulating fan-no more than 2% percent of total energy use;

(m) Heat recovery ventilators-CSA C439-00 standard;

(n) Gas, oil, or propane water heater-energy factor greater than or equal to 0.82 or thermal efficiency of at least 90% percent;

(o) Electric heat pump water heater-energy factor greater than or equal to 2.0.

AUTH: 15-1-201, 15-32-105, MCA

IMP: 15-32-102, 15-32-105, 15-32-106, 15-32-109, MCA

REASONABLE NECESSITY: The department proposes to amend ARM 42.4.209 based on a recommendation from the Department of Environmental Quality (DEQ). "SHGC" or "solar heat gain coefficient" is a measure of how well a window blocks the heat from sunlight passing into a structure. Based on information from DEQ, windows installed in structures in Montana should not be required to meet a minimum rating for this measure because the energy demands to cool a home are minor when compared to the demands for heating. Removing the SHGC rating eliminates an unnecessary requirement for individuals wanting to qualify for the credit.

42.4.303 CLAIMING AN ELDERLY HOMEOWNER/RENTER TAX CREDIT

(1) The elderly homeowner credit may be claimed by an eligible individual or, if an eligible individual dies before making a claim, by the personal representative of their estate, and must be made on ~~form~~ Form 2EC, Montana Elderly Homeowner/Renter Credit.

(2) The time for, and manner of making, a claim for the credit depends on whether or not the qualified individual (or the personal representative for them) files an individual income tax return for the year for which the credit is claimed.

(a) If an eligible individual files or is required to file an individual income tax return for the year for which the credit is claimed, the claim must be filed with the return on or before the due date of the return, including extensions. ARM 42.15.301 sets forth the rules for determining whether an individual is required to file a return. If a return is made by or for an eligible individual without making a claim for the credit, the credit may be claimed by filing an amended return within five years after the due date of the return, not including extensions.

(b) If an eligible individual is not required to file an individual income tax return, no later than April 15th of the fifth year following the claim year the claim must be:

(i) mailed to the department at the address set forth in ARM 42.1.101;

(ii) delivered to:

Department of Revenue

Sam W. Mitchell Building

Third floor, 125 North Roberts

Helena, Montana; or

(iii) filed electronically through the department's web site at: www.revenue.mt.gov.

(c) If an eligible individual is required to, but did not, file an individual income tax return the claim must be made by filing an individual income tax return with completed ~~form~~ Form 2EC as provided in (2)(a).

(d) If the taxpayer claiming the credit files their tax return electronically, he or she represents that they have completed ~~form~~ Form 2EC and have all the required documentation. The form and required documentation are tax records the taxpayer must retain and provide to the department on request.

(3) The following are examples showing how this rule is applied:

(a) Taxpayer is required to file an individual income tax return for ~~2008~~ 2011 and, although eligible, neglects to claim the credit by filing ~~form~~ Form 2EC with their ~~2008~~ 2011 individual income tax return which they file April 6, ~~2009~~ 2012. Taxpayer may claim the credit by filing an amended ~~2008~~ 2011 individual income return with completed ~~form~~ Form 2EC on or before April 15, ~~2014~~ 2017.

(b) Taxpayer, who is not required to file an individual income tax return for ~~2008~~ 2011, dies in February ~~2009~~ 2012. The taxpayer's personal representative, appointed June ~~2009~~ 2012, may at any time before April 15, ~~2014~~ 2017, either file a ~~2008~~ 2011 individual income tax return for the taxpayer with completed ~~form~~ Form 2EC or file ~~form~~ Form 2EC without filing a ~~2008~~ 2011 return.

(c) Taxpayer is required to, but does not file an individual income tax return for ~~2009~~ 2012. Taxpayer or, if the taxpayer has died, the personal representative of the taxpayer's estate, may claim the credit by filing a ~~2009~~ 2012 individual income return with completed ~~form~~ Form 2EC on or before April 15, ~~2015~~ 2018.

AUTH: 15-30-2609, 15-30-2620, MCA

IMP: 15-30-2609, 15-30-2339, MCA

REASONABLE NECESSITY: In accordance with 2-4-314, MCA, the department conducted a biennial review of all its administrative rules. As a result of that review, the department proposes to amend ARM 42.4.303 to make capitalization revisions and update the dates in the examples.

42.4.402 CREDIT FOR INCOME TAXES PAID TO ANOTHER STATE OR COUNTRY (1) through (3) remain the same.

(4) The credit cannot be claimed by an individual for taxes paid to another state or country by an estate or trust.

(4) remains the same, but is renumbered (5).

AUTH: 15-30-2620, MCA

IMP: 15-30-2302, MCA

REASONABLE NECESSITY: The department proposes to amend ARM 42.4.402 in response to a recurring question from preparers regarding the credit for taxes paid to another state in relation to income from estates and trusts. In some states, the tax on a nonresident individual beneficiary's share of the trust's income is paid by the trust. The proposed amendment specifies that 15-30-2302, MCA, does not allow the individual to claim the credit based on taxes paid by the trust.

42.4.1608 SUBMISSION OF EMPLOYEE LISTS (1) remains the same.

(2) In applicable instances, an expanding corporation shall submit five years of lists in order that an average employment figure can be determined and the number of new employees discovered. If a corporation has not done business for a five-year period, employee lists for all years of operation shall be submitted. A new corporation shall be exempt from this requirement.

(3) remains the same.

AUTH: 15-31-127, 15-31-501, MCA

IMP: 15-31-125, MCA

REASONABLE NECESSITY: In accordance with 2-4-314, MCA, the department conducted a biennial review of all its administrative rules. As a result of that review, the department proposes amending ARM 42.4.1608 to correct a grammatical error by inserting a missing word in (2).

42.4.1702 CREDIT FOR TEMPORARY EMERGENCY LODGING

(1) through (5) remain the same.

(6) The credit must be claimed on ~~form~~ Form TELC, Temporary Emergency Lodging Credit.

(7) through (9) remain the same.

AUTH: 15-1-201, 15-30-2620, 15-31-501, MCA

IMP: 15-30-2103, 15-30-2381, 15-31-101, 15-31-102, 15-31-171, MCA

42.4.2403 REDUCTION OF DEDUCTIONS ALLOWED FOR INSURANCE CLAIMS (1) An employer is not allowed to claim both a Montana credit and a deduction for the same insurance premium dollars paid.

(a) If the employer is not claiming a federal small business health insurance credit, the deduction claimed on the federal return is reduced by an amount equal to twice the Insure Montana credit claimed by the taxpayer when arriving at income for Montana purposes. For example, an employer determined to be eligible for $4,000 in tax credit must reduce their deduction for premiums by $8,000 ($4,000 x 2).

(b) If the employer is claiming a federal small business health insurance tax credit, their federal deduction may be reduced or completely eliminated. When the federal deduction is reduced for this reason, the deduction only needs to be further reduced for Montana purposes if the federal reduction is less than the Montana reduction that would otherwise be called for in (1)(a). For example, if an employer reduced their federal deduction by $5,000 and they are claiming an Insure Montana credit of $3,000, the reduction on the Montana return is $1,000 ($3,000 x 2 = $6,000 gross reduction less $5,000 federal reduction).

(c) The reduction of the deduction by an employer that is a C corporation must be made by entering the appropriate amount on ~~form~~ Form CLT-4, line 2, "Additions".

(d) The reduction of the deduction by an employer that is a sole proprietor, must be made by entering the appropriate amount on ~~form~~ Form 2, Schedule I, "Montana Additions to Income Federal Adjusted Gross ~~Income."~~ Income".

(e) The reduction of the deduction by an employer that is an S corporation must be made by entering the appropriate amount on ~~form~~ Form CLT-4S, line 15c, "Other additions", and on the Montana Schedule K-1s of the shareholders, line 13, ~~"Other additions."~~ "Other additions".

(f) The reduction of the deduction by an employer that is a partnership or a limited liability company that is taxed as a partnership must be made by entering the appropriate amount on ~~form~~ Form PR-1, ~~line 16.c, "Other additions,"~~ line 16c, "Other additions", and on the partners' or members' Montana Schedule K-1s, line 3, ~~"Other additions."~~ "Other additions".

(2) remains the same.

AUTH: 15-30-2104, MCA

IMP: 15-30-2368, 15-31-130, 33-22-2006, 33-22-2007, MCA

REASONABLE NECESSITY: In accordance with 2-4-314, MCA, the department conducted a biennial review of all its administrative rules. As a result of that review, the department proposes to amend ARM 42.4.2403 to make capitalization and punctuation revisions.

42.4.2404 COORDINATION WITH OTHER HEALTH INSURANCE CREDITS

(1) remains the same.

(2) An employer may not claim both the Insure Montana credit and the Health Insurance for Uninsured Montanans credit, ~~form H~~ Form HI, provided in 15-30-2367 and 15-31-132, MCA.

AUTH: 15-30-2104, MCA

IMP: 15-30-2367, 15-30-2368, 15-31-130, 15-31-132, 33-22-2006, 33-22-2007, MCA

REASONABLE NECESSITY: In accordance with 2-4-314, MCA, the department conducted a biennial review of all its administrative rules. As a result of that review, the department proposes to amend ARM 42.4.2404 to make capitalization and punctuation revisions, and to correct an incomplete reference to a form name.

42.4.2704 TAX CREDIT AND DEDUCTION LIMITATIONS (1) The credit allowed the corporation, ~~partnership, limited liability company,~~ estate, trust, or individual against its tax liability for a contribution of a planned gift is the percentage, as shown in the following table, of the present value of the allowable contribution as defined in ARM 42.4.2701. The credit allowed against the tax liability of the corporation, ~~partnership, limited liability company,~~ estate, or trust for a direct contribution is equal to 20% percent of the charitable contribution. The maximum credit that may be claimed in one year is $10,000 per donor. A contribution made in a previous tax year cannot be used for a credit in any subsequent tax year.

Planned Gifts by Individuals or Entities

Present Value

Planned Percent Used to Maximum

Gift of Present Calculate Credit

Date Value Maximum Credit Per Year

~~1/1/97 - 12/31/01 50% $20,000 $10,000~~

~~1/1/02 - 8/27/02 40% $25,000 $10,000~~

~~8/28/02 - 6/30/03 30% $22,000 $ 6,600~~

7/1/03 - 12/31/13 40% $25,000 $10,000

(2) The credit allowed against the corporate, estate, trust, or individual tax liability for a charitable gift made by a corporation, small business corporation, estate, trust, partnership, or limited liability company directly to a qualified endowment is the percentage, as shown in the following table, of the allowable contribution as defined in ARM 42.4.2701.

~~Non-Planned~~ Unplanned Gifts by Eligible Entities

Allowable

Contribution

Qualified Percent of Used to Maximum

Charitable Allowable Calculate Credit

Gift Date Contribution Maximum Credit Per Year

~~1/1/97 - 12/31/01 50% $20,000 $10,000~~

~~1/1/02 - 8/27/02 20% $50,000 $10,000~~

~~8/28/02 - 6/30/03 13.3% $49,624 $ 6,600~~

7/1/03 - 12/31/13 20% $50,000 $10,000

(3) The balance of the allowable contributions not used in the credit calculation may be used as a deduction subject to the limitations and carryover provisions found in 15-30-2131, MCA, or for corporations the limitations and carryover provisions found in 15-31-114, MCA.

(a) ~~Examples of~~ Example of an Allowable ~~Deductions~~ Deduction When a Planned Gift is Used for the Qualified Endowment Credit:

Time Present Maximum Credit Allowable

Period Value Credit Percentage Deduction

~~1/1/97 - 12/31/01 $50,000 - ($10,000 / .50) = $30,000~~

~~1/1/02 - 8/27/02 $50,000 - ($10,000 / .40) = $25,000~~

~~8/28/02 - 6/30/03 $50,000 - ($ 6,600 / .30) = $28,000~~

7/1/03 - 12/31/13 $50,000 - ($10,000 / .40) = $25,000

(b) ~~Examples of~~ Example of an Allowable ~~Deductions~~ Deduction When an Outright Gift is Used for the Qualified Endowment Credit:

Time Market Maximum Credit Allowable

Period Value Credit Percentage Deduction

~~1/1/97 - 12/31/01 $50,000 - ($10,000 / .50) = $30,000~~

~~1/1/02 - 8/27/02 $50,000 - ($10,000 / .20) = $ -0-~~

~~8/28/02 - 6/30/03 $50,000 - ($ 6,600 / .133) = $ 376~~

7/1/03 - 12/31/13 ~~$50,000~~ $55,000 - ($10,000 / .20) = ~~$ -0-~~ $5,000

(4) through (6) remain the same.

(7) The rate a beneficiary will use to calculate their credit for an allowable contribution passed to them by an estate will be based on the nature of the gift made by the estate. For example, if an estate makes an outright gift to a qualified endowment on July 17, 2012 and the contribution is passed to a beneficiary, the beneficiary will calculate their credit using the 20 percent rate.

(7) remains the same but is renumbered (8).

~~(8)~~(9) The maximum credit that may be claimed in a tax year by any donor for allowable contributions from all sources is limited to the maximum credit stated in (1) and (2). In the case of a married couple that makes a joint contribution, the contribution is assumed split equally. If each spouse makes a separate contribution, each may be allowed the maximum credit as stated in (1) and (2).

(a) Example 1: Assume a married couple makes a joint planned gift to a qualified endowment on September 1, ~~2008~~ 2012. The allowable contribution made by the couple is $30,000. That couple is eligible to take a credit of up to $12,000, with each claiming a credit of $6,000.

(b) Example 2: Assume a married couple makes separate planned gifts to qualified endowments on September 1, ~~2008~~ 2012, which result in an allowable contribution of $20,000 for each person. They each would be eligible to take a credit of up to $8,000.

(9) remains the same, but is renumbered (10).

AUTH: 15-30-2620, 15-31-501, MCA

IMP: 15-30-2327, 15-30-2328, 15-30-2329, 15-31-161, 15-31-162, MCA

REASONABLE NECESSITY: The department proposes to amend ARM 42.4.2704 to delete the reference to partnerships and limited liability companies being allowed to claim the credit against their tax liability. The only income tax that pass-through entities might incur is a composite tax, but the qualified endowment credit is not allowed against that liability. This is consistent with ARM 42.9.203, as revised in 2011, which affirmed that tax credits may not be taken against composite tax.

The department also proposes amendments to help individuals determine the appropriate rate to use when computing the qualified endowment credit. An estate may make either a planned gift or outright gift eligible for the qualified endowment credit. If the contribution is not used by the estate to calculate the credit and it passes to the individual, the rate they will use to calculate will be based on the nature of the contribution as it was made by the trust.

The department further proposes to remove examples with very outdated years, update the years in more current examples, and make another remaining example more informative.

Finally, the department proposes amendments to improve readability and make punctuation revisions.

42.4.2706 REPORTING REQUIREMENTS (1) The donor must attach a copy of the following information to the tax return reporting the credit:

(a) a receipt acknowledging the amount of the allowable contribution from the:

(i) tax-exempt organization under 26 USC 501(c)(3) holding the qualified endowment receiving the contribution;

(ii) trustee of the trust administering the planned gift; or

(iii) bank or trust company holding a qualified endowment on behalf of a tax exempt organization.

(b) the date of the contribution to the qualified endowment or the planned gift;

(c) the name of the organization incorporated or established in Montana holding the qualified endowment fund or the name of the tax exempt organization on behalf of which the qualified endowment fund is held;

(d) in the case of a charitable trust where the charity is yet to be named, the donor shall include a copy of the disposition clause of the charitable trust which gives evidence that a qualified endowment fund has been created; ~~and~~

(e) a description of the type of gift, i.e. outright gift, charitable remainder unitrust, charitable gift annuity, etc.; and

(f) in the case of an outright gift, the receipt in (a) must state that the contribution was placed in a permanent irrevocable fund as defined in ARM 42.4.2701.

(2) remains the same.

AUTH: 15-30-2620, 15-31-501, MCA

IMP: 15-30-2328, 15-30-2329, 15-31-161, 15-31-162, MCA

REASONABLE NECESSITY: The department proposes to amend ARM 42.4.2706 to inform taxpayers of information required to be filed with the tax return when an outright gift is made to a qualified endowment. The department currently requires that the information be submitted when claiming the credit in order to verify that the gift was placed in a permanent, irrevocable fund as required by law. The proposed amendments simply add this to the rules so they better inform taxpayers about the documentation necessary when claiming the credit.

42.4.2802 HEALTH INSURANCE FOR UNINSURED MONTANAN'S CREDIT (1) through (8) remain the same.

(9) A taxpayer who files a tax return electronically must complete ~~form~~ Form HI and retain the form and submit it to the department upon request.

(10) remains the same.

AUTH: 15-31-501, MCA

IMP: 15-30-2367, 15-30-2368, 15-31-132, 33-1-207, MCA

REASONABLE NECESSITY: In accordance with 2-4-314, MCA, the department conducted a biennial review of all its administrative rules. As a result of that review, the department proposes to amend ARM 42.4.2802 to make a capitalization revision and to add a missing implementing citation.

42.4.2905 CLAIMING THE HISTORIC PRESERVATION CREDIT

(1) Except as provided in (2) and (3), federal ~~form~~ Form 3468, the federal form used in claiming the federal rehabilitation credit, must be attached to the applicable Montana tax returns. S corporations and entities taxable as partnerships must attach the form to their information returns and the owners of the pass-through entities must also attach a copy to their individual income or corporation license tax returns.

(2) remains the same.

(3) A taxpayer who elected to transfer the federal rehabilitation credit to a lessee must attach a copy of the election statement required by U.S. Treasury regulation 26 C.F.R. 1.48-4(f) and (g), and the lessee's ~~form~~ Form 3468 that identifies the taxpayer as the transferor. If the credit calculation for certified historic structures on the lessee's ~~form~~ Form 3468 contains qualified rehabilitation expenditures other than those incurred by the taxpayer, the taxpayer must provide a schedule breaking out the taxpayer's own expenditures and a pro forma federal credit calculation.

AUTH: 15-30-2620, MCA

IMP: 15-30-2342, 15-31-151, MCA

42.4.3003 CLAIMING THE INFRASTRUCTURE USER FEE CREDIT

(1) remains the same.

(2) When claiming the credit, the taxpayer must attach to their tax return a completed copy of ~~form~~ Form IUFC, Infrastructure User Fee Credit. ~~This form must be certified by the county, verifying the amount of the infrastructure user fee paid and that the fee has been paid timely.~~

(3) remains the same.

(4) The credit is nonrefundable. Any excess credit must first be carried back to each of the three preceding taxable periods, reducing the tax liability to zero, and then carried forward to each of the seven taxable periods following the taxable period of the credit. The current year credit must be applied first before any carry back or carry forward will be allowed.

AUTH: 15-1-201, MCA

IMP: 17-6-309, 17-6-316, MCA

REASONABLE NECESSITY: The department proposes to amend ARM 42.4.3003 to delete unnecessary language in (2), as there is no requirement that the form be certified by the county. The department is also proposing amendments to the application of the credit by adding the carried forward provision which is allowed by statute, and a final amendment to make a capitalization revision.

42.4.3103 CREDIT FOR CONTRACTOR'S GROSS RECEIPTS TAX - CORPORATION LICENSE TAX (1) and (2) remain the same.

(3) In the event the public contractor's gross receipts tax is paid by a joint venture or a partnership, the members thereof shall be entitled to the credit for the tax as their respective interests appear. If the tax is paid by a corporation electing partnership type tax treatment under 15-31-202, MCA, the credit is passed through to its shareholders according to their respective interest in the corporation's common stock issued and outstanding.

(4) If the public contractor's gross receipts tax is paid by an S corporation, the credit must be attributed to shareholders using the same proportion used to report the corporation's income or loss for Montana income tax purposes.

AUTH: 15-31-501, MCA

IMP: 15-50-207, MCA

REASONABLE NECESSITY: The department proposes amending ARM 42.4.3103 to remove a reference to a repealed statute. The department also proposes amendments to update the language describing how the credit is attributed to shareholders of an S corporation, to be consistent with the language used in similar laws and rules.

42.4.3202 CREDIT FOR INCREASING RESEARCH ACTIVITIES (1) A credit for increases in qualified research expenses and basic research payments that occurred prior to January 1, 2011, is allowed to a qualified corporation, an individual, a small business corporation, a partnership, a limited liability partnership, or a limited liability company. Except as specifically limited by Montana law, 15-31-150, MCA, this credit is determined in accordance with 26 USC 41 as that section read on July 1, 1996.

(2) For tax years beginning after December 31, 2010, no current year credit may be claimed. Only unused amounts available as a carry forward under 15-31-150, MCA, may be claimed for the 15 succeeding tax years.

~~(2)~~(3) A taxpayer must file ~~form~~ Form RSCH providing information as prescribed on the form, which includes a copy of the form filed with the IRS to claim the federal credit for increasing research activities. If amounts paid or incurred do not apply to the federal credit after a termination date provided in 26 USC 41, a taxpayer whose expenses qualify for the Montana credit after the termination date must submit with ~~form~~ Form RSCH the information required on the federal form for the tax year immediately preceding the tax year in which the termination occurred.

(3) remains the same, but is renumbered (4).

~~(4)~~(5) Form RSCH must be filed with the tax return.

(a) For individual taxpayers, including single member limited liability companies that are owned by an individual and are disregarded for income tax purposes, if the tax return is filed by paper, the return and ~~form~~ Form RSCH must be mailed to:

Department of Revenue

P.O. Box 5805

Helena, Montana 59604-5805

(b) For corporations, partnerships, and entities taxed as corporations or partnerships, if the tax return is filed by paper, the return and ~~form~~ Form RSCH must be mailed to:

Department of Revenue

P.O. Box 8021

Helena, Montana 59604-8021

(c) If the tax return is filed electronically, ~~form~~ Form RSCH must be kept in the taxpayer's records and a copy provided to the department upon request.

AUTH: 15-30-2620, 15-31-150, 15-31-501, MCA

IMP: 15-30-2358, 15-31-150, MCA

REASONABLE NECESSITY: The department proposes amending ARM 42.4.3202 to reflect the current status of the credit for increasing research activities. For tax years starting after December 31, 2010, per statute (15-31-150, MCA), taxpayers are only allowed to claim the credit based on unused amounts carried forward from credits generated prior to January 1, 2011. The proposed amendments explain this and provide a reference to the relevant statute in the rule.

The department further proposes to make capitalization revisions.

42.4.3303 SUBMISSION OF COSTS AND APPLICATION FOR TAX CREDIT (1) At Within 60 days of the conclusion of the principal photography, the statement of expenditures and compensation paid to Montana residents referred to in 15-31-905, MCA, shall be sent to the department on ~~form~~ Form FPC-PP, Film Production Credit - Principal Photography. However, ~~when~~ the production company ~~ultimately files its application to receive the tax credit(s), it~~ may supplement this statement of expenditures and compensation with ~~an updated~~ a new statement that reflects expenditures and compensation paid to Montana residents arising after principal photography is complete. The company should complete a new Form FPC-PP, indicate that it is a supplement to a prior form, and submit it within 60 days of the completion of the additional photography.

(2) When the production company files its tax return, it shall complete ~~form~~ Form FPC, Film Production Credit, with supporting documentation and return it to the department along with ~~form~~ Form FPC-AF, Film Production Credit - Application Fee, and the appropriate fee as provided in 15-31-906, MCA.

(3) remains the same.

AUTH: ~~15-30-2105~~ 15-30-2620, 15-31-911, MCA

IMP: 15-30-2103, 15-31-906, 15-31-907, 15-31-908, 15-31-911, MCA

REASONABLE NECESSITY: The department proposes to amend ARM 42.4.3303 in order to make the process for obtaining the credit more efficient. The department appreciates that a production company may incur additional costs for filming that occurs after the close of principal photography. By having information about those costs submitted earlier, the department can determine the allowable credit amount in a timelier manner. When the company files its return, it will be processed more quickly and efficiently. The department also proposes amendments to correct an MCA reference and make capitalization revisions.

42.4.4106 APPEAL RIGHTS (1) remains the same.

(2) For energy-related income tax credits, an ~~applicant~~ individual or entity claiming the credit may appeal the department's ~~decision to the Office of Dispute Resolution~~ denial or other adjustment of the credit in accordance with ~~ARM 42.2.311 through 42.2.326 within 30 days of receiving notice from the department~~ ARM 42.2.510 and 42.2.613 through 42.2.621.

AUTH: 15-1-201, MCA

IMP: 15-1-211, 15-2-302, 15-31-501, MCA

REASONABLE NECESSITY: The department proposes to amend ARM 42.4.4106 in order to more accurately represent the appeal process for claims for the tax credit. The rule contemplates a process where a claim for the credit would be submitted and reviewed independently from the tax return such as the case with the Film Production and Expenditures credits. Currently, taxpayers claim the credit by completing Form AEPC and including it with their tax return. The department then either reviews the form and return when they are initially received or at a later date if the return is selected for audit. The proposed amendments will provide that any appeal of a denial of or adjustment to a claim for the credit will follow the standard appeal process.

42.4.4107 COMMERCIAL USE AND OTHER REQUIREMENTS FOR COMMERCIAL AND NET METERING SYSTEMS ELIGIBLE FOR THE INCOME TAX CREDIT (1) The credit against individual income and corporation license taxes provided in 15-32-402, MCA, is limited to 35% percent of the eligible costs for investments in depreciable commercial systems and net metering systems. Property placed in service for personal use does not qualify for this credit, but may qualify for the alternative energy system credit provided in 15-32-201, MCA, and ARM 42.4.104.

(2) The credit may not be claimed against taxes generally, but can only be applied against taxes due as a result of Montana taxable or net income produced by certain manufacturing plants, energy sales to new or expanded business facilities, or the alternative energy generating equipment itself. The determination of this income and associated tax is made on ~~form~~ Form AEPC, Alternative Energy Production Credit. Examples of qualification for the credit are:

(a) Company A manufactures windmills in Montana. Company A invests in and installs windmills to supplement the electricity needs of its manufacturing plant. Company A can claim the credit to offset taxes on income from sale of the windmills.

(b) Company B invests in a windmill farm. Company C is a new manufacturing plant in Montana. Company B enters into a direct sales contract to sell electricity to Company C. Company B is eligible to claim the credit to offset taxes on income from the sale of electricity to Company C.

(c) Company D invests in a windmill farm. Company D sells the electricity generated by its windmill farm to the power grid. The credit is available for Company D to offset taxes on income from the sale of the electricity.

(3) remains the same.

AUTH: 15-30-2620, 15-31-501, 15-32-407, MCA

IMP: 15-32-402, 15-32-404, 15-32-406, MCA

REASONABLE NECESSITY: In accordance with 2-4-314, MCA, the department conducted a biennial review of all its administrative rules. As a result of that review, the department proposes to amend ARM 42.4.4107 to make capitalization and punctuation revisions.

5. The department proposes to repeal the following rule:

42.4.2707 QUALIFIED ENDOWMENT CREDIT FOR CORPORATIONS which can be found on page 42-594 of the Administrative Rules of Montana.

AUTH: 15-30-2620, 15-31-501, MCA

IMP: 15-30-2131, 15-30-2152, 15-30-2327, 15-30-2328, 15-30-2329, 15-31-114, 15-31-161, 15-31-162, MCA

REASONABLE NECESSITY: In accordance with 2-4-314, MCA, the department conducted a biennial review of all its administrative rules. As a result of that review, the department proposes to repeal ARM 42.4.2707, because it has become redundant and unnecessary due to the subsequent amendment and/or repeal of other rules it had adopted by reference.

6. Concerned persons may submit their data, views, or arguments, either orally or in writing, at the hearing. Written data, views, or arguments may also be submitted to: Cleo Anderson, Department of Revenue, Director's Office, P.O. Box 7701, Helena, Montana 59604-7701; telephone (406) 444-5828; fax (406) 444-4375; or e-mail [email protected] and must be received no later than January 4, 2013.

7. Cleo Anderson, Department of Revenue, Director's Office, has been designated to preside over and conduct the hearing.

8. An electronic copy of this notice is available on the department's web site at www.revenue.mt.gov. Select the "Laws and Rules" link in the left hand column, and click on the "Rules" link within to view the options under the "Current Rule Actions - Published Notices" heading. The department strives to make the electronic copy of this notice conform to the official version of the notice, as printed in the Montana Administrative Register, but advises all concerned persons that in the event of a discrepancy between the official printed text of the notice and the electronic version of the notice, only the official printed text will be considered. While the department also strives to keep its web site accessible at all times, in some instances it may be temporarily unavailable due to system maintenance or technical problems.

9. The Department of Revenue maintains a list of interested persons who wish to receive notices of rulemaking actions proposed by this agency. Persons who wish to have their name added to the list shall make a written request, which includes the name and e-mail or mailing address of the person to receive notices and specifies that the person wishes to receive notice regarding particular subject matter or matters. Notices will be sent by e-mail unless a mailing preference is noted in the request. A written request may be mailed or delivered to the person in number 6 above or faxed to the office at (406) 444-4375, or may be made by completing a request form at any rules hearing held by the Department of Revenue.

10. The bill sponsor contact requirements of 2-4-302, MCA, do not apply.

/s/ Cleo Anderson /s/ Dan R. Bucks

CLEO ANDERSON DAN R. BUCKS

Rule Reviewer Director of Revenue

Certified to Secretary of State November 13, 2012