26 CFR 1.46-2 – Carryback and carryover of unused credit
(a) Effective date. This section is effective for taxable years beginning after December 31, 1975. For taxable years beginning before January 1, 1976, see 26 CFR 1.46-2 (Rev. as of April 1, 1979).
(b) In general. Under section 46(b)(1), unused credit may be carried back and carried over. Carrybacks and carryovers of unused credit are taken into account in determining the amount of credit available and the credit allowed for the taxable years to which they may be carried. In general, the application of the rules of this section to regular and ESOP credits are separate from their application to nonrefundable energy credits. For example, the limitations on carrybacks and carryovers of unused nonrefundable energy credit under section 46(b) (2) and (3), respectively, differ in amount from the limitations on the regular and ESOP credits because the tax liability limitations for those credits differ. See § 1.46-1(h). For a further example, see the special ordering rule in § 1.46-1(m). Section 46(b) does not apply to the refundable energy credit.
(c) Unused credit. If carryovers and credit earned (as defined in § 1.46-1(c)(1)) exceed the applicable tax liability limitation, the excess attributable to credit earned is an unused credit. The taxable year in which an unused credit arises is referred to as the “unused credit year”.
(d) Taxable years to which unused credit may be carried. An unused credit is a carryback to each of the 3 taxable years preceding the unused credit year and a carryover to each of the 7 taxable years succeeding the unused credit year. An unused credit must be carried first to the earliest of those 10 taxable years. An unused credit then must be carried to each of the other 9 taxable years (in order of time) to the extent that the unused credit was not absorbed during a prior taxable year because of the limitations under section 46(b) (2) and (3).
(e) Special rule for pre-1971 years—(1) In general. For unused credit years ending before January 1, 1971, unused credit is allowed a 10-year carryover rather than the 7-year carryover. The principles of paragraph (d) of this section apply to this 10-year carryover.
(2) Cross reference. For limitations on the taxable years to which unused credit from pre-1971 credit years may be carried, see paragraph (g) of this section.
(f) Limitations on carrybacks. Under the FIFO rule to section 46(a)(1), carryovers and credit earned are applied against the tax liability limitation before carrybacks. Thus, carrybacks to a taxable year may not exceed the amount by which the applicable tax liability limitation for that year exceeds the sum of carryovers to and credit earned for that year. Carrybacks from an unused credit year are applied against tax liability before carrybacks from a later unused credit year. To the extent an unused credit cannot be carried back to a particular preceding taxable year, the unused credit must be carried to the next succeeding taxable year to which it may be carried.
(g) Limitations on carryovers—(1) General rule. Carryovers to a taxable year may not exceed the applicable tax liability limitation for that year. Carryovers from an unused credit year are applied before carryovers from a later unused credit year.
(2) Exception. A 10-year carryover from a pre-1971 unused credit year may, under certain circumstances, be postponed to prevent a later-earned 7-year carryover from expiring. This exception does not extend the 10-year carryover period for pre-1971 unused credit. See section 46(b)(1)(D).
(h) Examples. The following examples illustrate paragraphs (a) through (g) of this section.
*For line “A” each year: Lesser of (1) tax liability or (2) $25,000 + (percentage in col. (3) × [col. (2) ? $25,000]). See, § 1.46-1(h). For other lines: Amount in col. (6) on preceding line. *See footnote to the chart in *See footnote to chart under (1) (2) (3) (4) (5) (6) (7) Credit available Tax liability Percent Tax liability limitation (remaining from col. (6) on preceding line) Credit allowed (lower of (1) or (4)) Remaining tax liability limitation1 Unused credit2 or (amount absorbed) 1977: A. Credit earned $20,000 $45,000 50 $35,000 $20,000 $15,000 0 B. Carryback from 1978 *15,000 [15,000] 15,000 1978: A. Credit earned 80,000 55,000 50 40,000 40,000 0 $20,000 Carryback to 1977 (*15,000) Carryover to 1979 (*5,000) 1979: A. Carryover from 1978 *5,000 50,000 60 40,000 6,000 35,000 B. Credit earned 50,000 [35,000] 35,000 0 15,000 Carryover to 1980 (*15,000) 1980: A. Carryover from 1979 *15,000 55,000 70 46,000 15,000 31,000 B. Credit earned 25,000 [31,000] 25,000 6,000 0 (1) (2) (3) (4) (5) (6) (7) Credit available Tax liability Percent Tax liability limitation* (remaining from col. (6) on preceding line) Credit allowed (lower of (1) or (4)) Remaining tax liability limitation3 Unused credit4 or (amount absorbed) (a) Regular (b) Energy5 1977: Regular: A. Credit earned $20,000 $45,000 50 $35,000 $20,000R $15,000 0 B. Carryback from 1978 *15,000 [15,000] 15,000R 0 1978: Regular: A. Credit earned 60,000 55,000 50 40,000 40,000R 0 $20,000 Carryback to 1977 (*15,000) Carryover to 1979 (*5,000) Energy: A. Carryback from 1979 *15,000 $15,000 100 15,000 15,000E 0 1979: Regular: A. Carryover from 1978 *5,000 50,000 60 40,000 5,000R 35,000 B. Credit earned 50,000 [35,000] 35,000R 0 15,000 Carryover to 1980 (*15,000) Energy: A. Credit earned 35,000 10,000 100 10,000 10,000E 0 25,000 Carryback to 1978 (*15,000) Carryover to 1980 (*10,000) 1980: Regular: A. Carryover from 1979 *15,000 55,000 70 46,000 15,000R 31,000 B. Credit earned 25,000 [31,000] 25,000R 6,000 0 Energy: A. Carryover from 1979 *10,000 15,000 100 15,000 10,000E 5,000 (1) (2) (3) (4) (5) (6) (7) Credit available Tax liability Percent Tax liability limitation* (remaining from col. (6) on preceding line) Credit allowed (lower of (1) or (4)) Remaining tax liability limitation6 Unused credit7 or (amount absorbed) (a) Regular (b) Energy8 1979 (restated): Energy: To be carried over $10,000 Carryover to 1980 (*9,000) Carryover to 1981 (*1,000) 1980 (restated): Regular: A. Carryover from 1979 $15,000 $55,000 70 $46,000 $15,000R $31,000 B. Credit earned *25,000 [31,000] 25,000R 6,000 0 C. Carryback from 1981 *6,000 [6,000] 6,000R 0 Energy: A. Carryover from 1979 *9,000 $9,000 100 9,000 9,000E 1981: Regular: A. Credit earned 37,000 32,500 80 31,000 31,000R 0 6,000 Carryback to 1980 (*6,000) Energy: A. Carryover from 1979 *1,000 1,500 100 1,500 1,000E 500 0
(i) [Reserved]
(j) Electing small business corporation. A shareholder of an electing small business corporation (as defined in section 1371(b)) may not take into account unused credit of the corporation attributable to unused credit years for which the corporation was not an electing small business corporation. However, a taxable year for which the corporation is an electing small business corporation is counted as a taxable year for determining the taxable years to which that unused credit may be carried.
(k) Periods of less than 12 months. A fractional part of a year that is considered a taxable year under sections 441(b) and 7701(a)(23) is treated as a preceding or succeeding taxable year for determining under section 46(b) the taxable years to which an unused credit may be carried.
(l) Corporate acquisitions. For carryover of unused credits in the case of certain corporate acquisitions, see section 381(c)(23).