7886 / How does the enhanced oil recovery credit work in conjunction with the general business credit?

(1)  the taxpayer’s tentative minimum tax (as calculated without reduction for the alternative minimum tax foreign tax credit or the taxpayer’s regular tax liability), or

(2) for most credits, 25 percent of the amount by which the taxpayer’s net regular tax liability exceeds $25,000.²

“Net income tax” means the sum of the taxpayer’s regular and alternative minimum tax liabilities, reduced by the sum of the nonrefundable personal credits, the foreign tax credit, certain energy credits, and the Puerto Rico economic activity credit. “Net regular tax liability” means the taxpayer’s regular tax liability reduced by the sum of the nonrefundable personal credits, the foreign tax credit, certain energy credits, and the Puerto Rico economic activity credit.³ For these purposes the taxpayer’s regular tax liability does not include certain specified taxes, such as the alternative minimum tax and certain penalty taxes on premature distributions from qualified plans or ordinary annuity contracts.⁴ See Q 777 on the alternative minimum tax.

The $25,000 amount applies to the individual partners and not to the partnership. Similarly, the $25,000 amount applies to the S corporation shareholder and not to the S corporation. Estates, trusts, and controlled groups of corporations must apportion the $25,000 amount. For married taxpayers filing separately, $12,500 is substituted for $25,000, unless the spouse of the taxpayer has no general business credit for the year. REITs, RICs, and certain banking organizations apply a ratable share of the $25,000 amount.⁵

The amount of the general business credit that exceeds the above limitation (i.e., the unused general business credit) for any taxable year generally may be carried back to the preceding year and carried over to the succeeding 20 years.⁶ (For credits arising in tax years beginning before 1998, credits could be carried back to the preceding three years and carried over to the succeeding 15 years.) However, there are limitations on certain carrybacks.⁷

Where a portion of the general business credit remains unused at the end of the carryover period, the taxpayer may deduct from adjusted gross income in the first taxable year following the last carryover year available the amount of the unused credit remaining in the case of the qualified business credits, including the enhanced oil recovery credit and the rehabilitation credit (see Q 7808), with respect to which a basis adjustment was required.⁸ If a taxpayer dies or ceases to exist before the end of the carryover period, any such allowable deduction is taken in the taxable year in which death or cessation occurs.⁹

The order in which the various general business credits are treated as used, or carried back or forward, is determined by the order in which they are listed in IRC Section 38(b) at the end of the year in which the credits are used.¹⁰

The allowable general business credit that is attributable to a passive activity may offset tax liability attributable only to passive activities¹¹ (see Q 7902).