Can the 41g carryover from 2015 be fully used to offset 2016 TMT or is there a limitation in addition to the R&D credit imitation calculation for line 4i on Form 3800?

[nwcpa]

I am amending a 2016 personal tax return to claim the addl research credit available to ESB resulting from PATH Act.  I have a 2015 Gen bus credit (research) carryover of $138K and a 41(G) limited research credit of $68K ($206K combined carryforward.)  Question is whether or not that whole amount can be considered for 2016 tentative minimum tax offset?  Amended Form 3800 Part III line 4i calc shows $95K, flowing through to Part II line 30, and at bottom of Part II line 38 I am showing a total credit allowable of $124K.  I did manual 41G calculation for form 3800 line 4i, and shows that the $95K is correct.  Is there a further limitation or some piece I am missing?  This seems like a LOT of credit to be able to get refunded. (Initial filed return incorrectly did not show that business was a ESB, and credit was only $31K which was the tax above TMT.

Thank you for any help!

[itonewbie · Accepted solution]

The same §38(c) limit takes into account c/f and c/b under subsection (a).

[itonewbie]

If you haven't already, you should check whether you've limited the §41(g) credit in relation to the activity that generated that credit pursuant to §§1.41-7(c), in accordance with the principles outlined in §§1.53-3.

[nwcpa]

If you will please assist in further clarification on this calc since it's a large add'l credit:  Client's 2016 TMT is $127K, regular tax is 158K, no AMT.  The 41(g) limitation is $95K (form 3800 line 4i AND my manual calc) , and the 41(g) c/f from 2015 is 68K and Gen'l Bus credit c/f from 2015 is $138K. Lacerte has calculated the full 96K credit PLUS 31K (reg tax 158 -TMT 127).  I think Lacerte is wrong and has overstated calc but they say their software is calculating correctly.   THANK YOU for any add'l assistance here!     What's messing me up is that in 2015 client was not an ESB but was ESB in 2016.

[nwcpa]

Salient fact:  2016 research credit generated by the business was $28K.   I think that he would get full 28K since below 41(g) limit, PLUS the difference between ordinary tax and TMT, $31K.  Total 2016 credit should be $28K plus $31K = $59K.     Thank you for adding to this.  

[itonewbie]

You said this is an ESB, correct?  Assuming your client also met the gross receipt test, §31(c)(4) would eliminate the limit for TMT and, thereby, allow the credit to offset AMT (after reduction for credits other than other than the specified credits under subsection (a)).  It would appear that you may not have taken that into account.  The bigger question is whether the "Gen'l Bus credit" you mentioned is also a specified credit that is eligible for that treatment.

If you have entered the correct c/f details for the respective entities, Lacerte will correctly take into account not only the credit from CY but also c/f (as well as c/b) in determining the allowable credit shown in Part III, subject to §41(g) limitation.  The computation for each pass-through entity's §41(g) limitation for the year can be found on the respective Federal Worksheets (which should jive with your offline calculation).  The amount(s) would then flow to Part II, with the credit allowed computed in accordance with §38(c)(1) and (4) before it flows to F.1040.

It's working as I expected in my dummy.

[nwcpa]

Thank you itonewbie! Last Question: Is the 41(g) carryforward limited to the 2015 pre-PATH law in 2016, or that c/f now unrestricted and s/t TMT:tax limit?  

[nwcpa]

The gen'l bus credit IS related to the same research credit/business entity.  Just that the c/f was broken down in to two pots:  GBC and 41(g) limited credit.

[itonewbie]

"Is the 41(g) carryforward limited to the 2015 pre-PATH law in 2016, or that c/f now unrestricted and s/t TMT:tax limit? "

Ah, I see your problem now.  For that, I would refer to §38(c)(4)(B)(ii) which stipulates that the credit determined under section 41 ***for the taxable year*** must be with respect to an eligible small business.  Furthermore, legislative history is clear clear that this provision is for "research credit determined under section 41 ***for taxable years beginning after December 31, 2015***."

Since credits for each taxable year are first determined under the respective code sections (in this case §41(g)) and then subject to the relevant limitations (in this case §38(c)), I would surmise that carryover from tax year 2015 would not be eligible for §38(c)(4) on the basis the credit was for a taxable year prior to January 1, 2016 (even if it were a ESM in that year).

This essentially means that credits from these carryover from 2015 would be limited to the TMT.  To achieve this, you will need to enter the carryover credits on Screen 34 by clicking on the "Elections/Carryovers/Overrides" button instead of the section for Prior Year Unallowed Credit (as Lacerte would treat your entries for §41(g) credit as ***not*** being subject to TMT limit).

The carryforward credits will now show up on a separate Part III with Box C checked and limited on Part II.

[nwcpa]

Thank you itonewbie!  I will try it!  

[itonewbie]

NP, @nwcpa!