The process for carrying forward unused nonrefundable credits such as general business or nonrefundable energy credits generally involves:
Carryover Rules
- Timeframe: Unused credits can typically be carried back 3 years and forward 7 years (10 years total) from the unused credit year.
- Exception: For tax years ending before January 1, 1971, a 10-year carryforward was allowed instead of 7 years.
- Foreign tax credits have a 10-year carryback under special rules.
- Order of Application:
- Unused credits must first be applied to the earliest eligible year within the 10-year window.
- Remaining credits are applied chronologically to subsequent years.
- Limitations:
- Credits are subject to the tax liability limit under § 46(b) (e.g., § 38(c) for general business credits).
- Nonrefundable energy credits have separate limitations from regular/ESOP credits.
Deduction for Expired Credits
If credits remain unused after the carryforward period expires (or due to taxpayer death):
- Calculation:
- Step 1: Total current-year credits + carryovers.
- Step 2: Compute regular tax liability before credits.
- Step 3: Apply § 38(c) limitation to determine credits usable in the current year.
- Step 4: Subtract used credits (Step 3) from total credits (Step 1). The excess converts to a § 196 deduction.
- Timing:
- Deduct the § 196 amount in the following year if credits expire.
- On cessation/death, deduct in the final tax year.
Administrative Requirements
- Amended returns: Use Form 1040-X for adjustments (processing takes 8-16 weeks).
- Documentation: Track credit usage annually to optimize carryforward/carryback applications.
For nonrefundable energy credits, ensure separate calculations due to differing liability limits compared to regular credits.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/what-is-the-process-for-carrying-forward-unused-nonrefundable-credits/
