Tax credit carryforwards, less may be more

Credits and Incentives talk with Deloitte

​“Credits & Incentives talk with Deloitte,” is a monthly column by Kevin Potter of Deloitte Tax LLP, featured in the Journal of Multistate Taxation and Incentives, a Thomson Reuters publication. The June issue of "Credits & Incentives talk with Deloitte" discusses possible options for carrying forward excess tax credits.

Utilizing tax credits

Many states and localities in the United States. utilize tax credits as a "carrot" to incentivize behaviors they want to encourage from individual and corporate citizens. This could include behavior such as hiring or investing to start or expand a business, providing health insurance or other benefits to employees, or preserving historic landmarks. However, just because jurisdictional tax credits may be generated by a company, it doesn't mean that the company will necessarily derive benefit from the credits. In fact, many companies are often left asking: Can I carry my excess tax credits forward and will I be able to fully utilize them? Did these credits come with a cost?

The answer to these questions may not be as straightforward as it seems because credit utilization may be limited due to:

  • Net operating losses
  • The mechanics of the credit itself
  • State-imposed restrictions that apply to credit utilization in general

Also, depending on the company's future plans related to corporate structure or relocation, credit utilization may be further limited or, worse yet, non-existent.

When a business cannot utilize all of its income tax credits in the current year, in some cases the excess credits may be carried forward or utilized in an alternative fashion, such as against other taxes, or by assignment, transfer or sale.

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