New carry-back rules for general business tax credits
It’s not often that we get excited about a tax change. But with restaurants and their owners standing to reap potentially large tax refunds as a result of a recent change involving expanded carry-back rules for general business credits, we’re a bit giddy. These expanded rules impact tax credits generated in 2010 but unable to be used in that tax year due to tax liability limitations. These new rules impact many of our clients as they apply to both C corporations that generate credits and individuals who receive credits from pass-through entities such as S corporations or LLCs.
Former law stated that unused general business tax credits could be carried back only one tax year with any remaining unused credits carried forward up to 20 years. However, under the Small Business Jobs Act of 2010, Eligible Small Business Credits (ESBCs) generated in tax year 2010 – but not used in 2010 – can now be carried back up to five tax years. This is a “win” for the restaurant industry as the new law allows ESBCs to offset both regular tax and alternative minimum tax (AMT) in all of the carry-back years. This is especially significant when carrying back credits to 2005 and 2006 since, under prior law, credits could only offset AMT in 2007 and subsequent years.
ESBCs are general business tax credits [e.g., Work Opportunity Tax Credit (WOTC) and Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips (FICA credit)] generated by an “eligible small business,” defined as: (1) a non-publicly traded corporation, partnership, or sole proprietorship and (2) having average annual gross receipts of not more than $50 million for its last three tax years preceding the 2010 tax year. When analyzing the gross receipts of an entity, all members of a controlled group of corporations and entities under common control are treated as a single taxpayer. With respect to credits generated by a pass-through entity such as an S corporation or an LLC, the gross receipts test must be met by both the entity and the individual owner. Businesses not in existence for the entire three-year period use average annual receipts based on the period in existence.
With a little work, eligible taxpayers can potentially receive a big payoff. To claim a five-year carry-back tax credit, taxpayers must file amended tax returns, starting with 2005 and continuing until the credit is exhausted. Amounts remaining after amending 2009 can be carried forward 20 years starting in 2011. Special disclosures and notations must be made on the amended tax returns for the credit to be claimed. Remember, as with any tax law change, it is best to consult with a tax professional to ensure your situation is fully evaluated.