Help with credit assignments
Corporation left a combined reporting group
If a corporation leaves a combined reporting group (ex: go to a different group, is sold by parent), they:
- Take credit(s) previously assigned to them
- Retain any limitations that may have been applicable on the use of the credit
If a unitary subsidiary leaving the group files a short year return and wants to assign its unused credit to the parent, use the last day of the unitary subsidiary’s short tax year to analyze if the assigning subsidiary and the assignee are in the same combined reporting group as of the last day of assignor’s taxable year.
Scenario: Parent Corporation A sells a unitary subsidiary Corporation B on April 1, 2018, and Corporation B wants to assign its unused credit to Corporation A.
Answer: Corporation B’s short period return ending date of March 31, 2018, will be used to analyze if both Corporation A and Corporation B are in the same combined reporting group as of the last day of assignor’s taxable year.
Burden of proof
If we audit an assignee after they leave a combined reporting group they must prove:
- They’re entitled to use the credit
- The amount of credit was properly calculated
If we disallow a credit
If a previously assigned credit is disallowed at audit, the assignor and assignee will be jointly and severally liable for any applicable tax and penalties.
Scenario: Assignor A has $100 of available credit and assigns $60 of the credit to Assignee B. We later determine that Assignor A only has $50 available credit in 2017 to assign. How are we going to disallow the credit? Will the credit be disallowed from Assignor A first, from Assignee B first, or on a pro-rata basis?
Answer: Assignor A and Assignee B are jointly and severally liable for any tax, addition to tax, or penalty resulting from the disallowance of any "eligible" credit. Any disallowance of the credit, including credit carryovers, will be made per the default provisions of 23663-2 (a) to (c).
Non-unitary assignee receiving credit assignment
If we determine that the assignee receiving the credit assignment is not unitary, the credit goes back to the assignor for future use, as if the election had not been made.
The assignor will be able to use the credit only after a final determination is made. If both assignor and assignee have been issued Notice of Proposed Assessments, the assignor will be able to use the credit only after a final determination has been made for both the assignor and the assignee.
Under the regulation provisions, both assignor and assignee may also request us to bindingly allocate the credit to the assignor.
Including entities in a taxpayer’s combined report
If we determine at audit that a certain entity should have been included in a taxpayer's combined report in a certain year, they will not be able to retroactively assign any credit generated in that year to this newly included entity.
However, if credit carryover from that year is available in future years they will be able to assign it to the new entity in a subsequent year original return.
If an acquisition occurred, and resulting limitations applied to any acquired credits, the limitations would apply to the "eligible assignee" following any subsequent assignment of such credits.
Expense and capitalization adjustments
To calculate some credits taxpayers lose a deduction or need to reduce an amount of capitalized costs. Since these adjustments are made by the entity generating the credit, the assignee does not have to make any such adjustments.
Enterprise zone offsets
For credits they generate on their own, or receive as an assignment, the assignee would only have to compute one EZ limitation. This will be based on its own income and factors attributable to the Zone for the year the assignee is trying to use the credit.
Research and development credit
The assignee does not need to be engaged in qualified research in order to be able to use the assigned R&D credit.
Sale of a credit
An agreement between the assignor and assignee can include compensation or remuneration to receive credits by assignment. For California purposes, there are no tax consequences, but there may be federal tax consequences.
Scenario: If Company A assigns unused credits to Company B for $100,000 and both are members of the same combined group, are there any non-California related tax consequences?
Answer: It is possible there may be federal or other state income tax consequences as a result of the entity using the assigned credit, as well as income from “selling” the credits to a related entity.
Disregarded entity limitations
California law limits the amount of credit which may be applied to reduce "tax" when the credit is attributed to a disregarded business entity. Specific calculations are required to determine this amount.
When a credit subject to this limitation has been validly assigned, and the assignee is not the single member of the disregarded business entity, the calculations and resulting limitation will prevent the assignee from applying the assigned credit against its "tax".
The above limitations apply to credit generated by an entity only in the years it reports as a disregarded entity. Any credit amount generated in years before or after the entity was disregarded, which is assigned to an affiliate will not be subject to the disregarded entity limitations. Refer to Technical Advice Memorandum 2018-01 for additional information.
Other assignment laws
The general credit assignment provisions do not prohibit or restrict assignment or sale of tax credits allowed under Low Income Housing Tax Credit and California Film and Television Tax Credit laws.