Legal ruling 1993-2

Franchise Tax Board - Legal Division
PO Box 1468
Rancho Cordova CA 95812-1468

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FAX: (---) --------

October 04, 1993

Control Number: 410:BRL:CL-93-0151

Child Care Facility Startup Expense Credit Limitations and Carryover


What amount of Child Care Facility Startup Expense Credit may be taken in the current year, and how much may be carried over to future years in the situations presented below?


Situation 1: Corporation A incurred start-up expenses in Year 1 for a single child care facility in the amount of $1,000,000. A had a California tax liability for Year 1 after application of all other available credits of $70,000.

Situation 2: Same as Situation 1 except that A's California tax liability for Year 1 was $10,000.

Situation 3: Same Year 1 facts as Situation 2. In Year 2, Corporation A incurred an additional $100,000 in qualified start-up expenses, and has a California tax liability (before application of this credit) of $60,000.

For purposes of this Ruling, it is assumed that Alternative Minimum Tax (AMT) and the AMT credit limitations did not apply in any of the above situations.

Law and Analysis

Revenue and Taxation Code (RTC) §23617 provides a tax credit for the costs paid or incurred for startup expenses of establishing a child care program or constructing a child care facility in California. RTC §17052.17 provides a similar credit for taxpayers subject to the Personal Income Tax.

Specifically, subdivision (b) of both sections provides in relevant part that "the credit allowed by this section" shall be 30 percent of the cost paid or incurred "by the taxpayer" for the startup expenses of constructing "a child care facility" in California.

RTC §§23617(b)(2) and 17052.17(b)(2) limit the amount of the "credit allowed by this section" to $50,000 for any income (taxable) year.

RTC §23617(e) provides that where the credit allowed under subdivision (b) of that section exceeds the "tax" (as defined in §23036) the excess may be carried over to reduce the "tax" in the following year. Paragraph (2) of subdivision (e) limits the aggregate of prior year carryovers and current year credits to a total of $50,000 per year. Section 17052.17 contains similar provisions.

Note that what is available for carryover is not the excess cost incurred during the year, but the amount that the credit (limited to $50,000) exceeds the tax for the year. In the situations above, even though 30% of the cost is $300,000, only $50,000 of that amount is allowed as a credit for the current year. Only to the extent that the $50,000 exceeds current year tax liability is there a carryover to future years.

Each year, up to $50,000 of current year credit may be added to the carryforward, but in no case can the credit amount taken against tax (including the aggregate of the carryforward and current year credit) exceed $50,000 in any one year.


Situation 1: Corporation A may take the full $50,000 credit in Year 1. Because the allowable credit did not exceed "tax" for the year, there is no carryforward.

Situation 2: Corporation A may take a $10,000 credit in Year 1, reducing "tax" to zero. Because the amount of the allowable credit ($50,000) exceeded "tax" ($10,000), A may carry forward $40,000 and pays only the minimum franchise tax for Year 1.

Situation 3: For Year 2, Corporation A generated an additional current-year credit of $30,000 based on expenditures in Year 2. The $40,000 carryforward from Year 1 is added to the $30,000 Year 2 credit for a total tentative credit of $70,000. $50,000 may be applied to reduce tax in Year 2 and $20,000 is carried forward to Year 3.

Drafting Information

The principal author of this notice is Bruce R. Langston of the Franchise Tax Board Legal Division. For further information regarding this notice, contact Mr. Langston at the Franchise Tax Board Legal Division, P.O. Box 1468, Sacramento, CA 95812-1468.

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