Carrybacks and Carryforward of the General Business Credit

In order to provide some uniform rules about dollar limitations, carrybacks and carryforwards, and other technical details, many of the federal income tax credits available to businesses that were discussed above are lumped together and treated as components of the "general business credit."

The order in which the components are claimed is important. If you plan to claim more than one of these credits for the year, you must claim them in the prescribed order, using Form 3800, General Business Credit. That way, if you exceed your credit dollar limit for the year, the credits further down the list will be the ones that are carried back or carried over to other years.

Example Sally's general business credit for the year is $30,000. Her net income tax is $27,500. Her tentative minimum tax, figured on Form 6251, is $18,487. The amount of general business credit she can take for the year is $9,013. This is the net income tax of $27,500 minus the larger of her tentative minimum tax, $18,487, or 25 percent of her net regular tax liability that is more than $25,000 (25% of $2,500 = $625). Since $18,487 is larger than $625, she subtracts $18,487 from $27,500 to arrive at $9,013.

Carrybacks and carryforwards. If the dollar limitations on the general business credit prevent you from claiming all of it in the year that it was earned (the "credit year"), you can generally carry it back to the year preceding the credit year, and forward to the following 20 years. Credits arising before 1998 could be carried back for the three years preceding the credit year, and forward to the 15 years following the credit year.

To claim a carryback, first, try to carry the credit back to the earliest allowable year preceding the credit year, observing your remaining dollar limit on credits for that year. If you can't use it up in that year, move on to the following year. This process is repeated until the credit is used up, or until the end of the carryover period — if any credit is still left, it can be deducted in the year following the last carryover year. Some credits have special rules under which they can't be carried back to a year before that particular credit was enacted into law — and this is one reason why it's important to claim credits in the correct order. Others have special carryover periods. For example, the foreign tax credit can only be carried back to the past two years and forward for five years.

If you have any carrybacks or carryforwards from other credit years, figure your general business credit for this year in the following order: (1) any carryforwards to this year, the earliest ones first; (2) the business credits for this year; and (3) any carrybacks to this year, the earliest ones first. As a result of this rule, in each year the oldest credits (and the ones closest to expiring) will always be used up first, and the newest credits become carryovers if the business credit limit is exceeded.

Special carryback period for eligible small businesses. Eligible small business credits of an eligible small business for its first tax year beginning in 2010 may be carried back 5 years and forward 20 years. Eligible small business credits are the credits that make up the current year business credit component of the general business credit. An eligible small business is a sole proprietorship, partnership, or non-publicly traded corporation with $50 million or less in average annual gross receipts during the three tax years preceding the first tax year beginning in 2010. The eligible small business credits determined for 2010 may be claimed against the eligible small business' regular and alternative minimum tax (AMT) liabilities.

Claiming the Carryback. To claim a carryback, you must generally file an amended return (Form 1040X, Amended U.S. Individual Income Tax Return, or 1120X, Amended U.S. Corporation Income Tax Return) for the tax year to which you're carrying the credit. You can also apply for a quick refund of taxes for a prior year by filing Form 1045, Application for Tentative Refund, or Form 1139, Corporation Application for Tentative Refund. Either of these two forms is used to claim a tentative adjustment of tax from a general business credit carryback.