26 CFR 1.53-3 – Separate rule for pass-through of jobs credit
(a) In general. Under section 53(b), in the case of a new jobs credit or targeted jobs credit earned under section 44B by a partnership, estate or trust, or subchapter S corporation, the amount of the credit that may be taken into account by a partner, beneficiary, or shareholder may not exceed a limitation under section 53(b) separately computed with respect to the partner’s, beneficiary’s, or shareholder’s interest in the entity. A credit is subject to the limitation of section 53(b) with respect to a partner, beneficiary, or shareholder if it is earned by a partnership, estate or trust, or subchapter S corporation in a taxable year ending within, or ending before, a taxable year beginning before January 1, 1979 of the partner, beneficiary, or shareholder. See paragraph (f) of this section for rules on carryback or carryover of a credit subject to separate limitation. This section prescribes rules, under the authority of section 44B(b), relating to the computation of the separate limitation. For purposes of this section, references to section 53(a) and (b) are to that section as it existed before it was amended by the Revenue Act of 1978. This paragraph may be illustrated by the following examples:
(b) Application of credit earned. A credit earned under section 44B by a partnership, estate or trust, or subchapter S corporation shall be applied by a partner, beneficiary, or shareholder, to the extent allowed under section 53(b), before applying any other credit earned under section 44B. For example, if an individual has a new jobs credit from a proprietorship of $2,000 and from a partnership (after applying section 53(b)) of $1,800, but the credit must be limited under section 53(a) to $3,000, the entire $1,800 credit from the partnership would be applied before any part of the $2,000 amount is applied.
(c) Amount of separate limitation. The amount of the separate limitation is equal to the partner’s, beneficiary’s, or shareholder’s limitation under section 53(a) for the taxable year multiplied by a fraction. The numerator of the fraction is the portion of the taxpayer’s taxable income for the year attributable to the taxpayer’s interest in the entity. The denominator of the fraction is the taxpayer’s total taxable income for the year reduced by the zero bracket amount, if any.
(d) Portion of taxable income attributable to an interest in a partnership, estate or trust, or subchapter S corporation—(1) General rule. The portion of a taxpayer’s taxable income attributable to an interest in a partnership, estate or trust, or subchapter S corporation is the amount of income from that entity the taxpayer is required to include in gross income, reduced by—
(i) The amount of the deductions allowed to the taxpayer that are attributable to the taxpayer’s interest in the entity; and
(ii) A proportionate share of the deductions allowed to the taxpayer not attributable to a specific activity (as defined in paragraph (e)).
(2) Deductions attributable to an interest in an entity. Examples of deductions that are attributable to the taxpayer’s interest in an entity include (but are not limited to) a deduction under section 1202 attributable to a net capital gain passed through the entity, and a deduction attributable to a deductible item (such as a charitable contribution) that has been passed through the entity.
(3) Computation of the proportionate share of deductions not attributable to a specific activity. The proportionate share of a deduction of the taxpayer not attributable to a specific activity is obtained by multiplying the amount of the deduction by a fraction. The numerator of the fraction is the income from the entity that the taxpayer is required to include in gross income, reduced by the amount of the deductions of the taxpayer that are attributable to the taxpayer’s interest in the entity. The denominator is the taxpayer’s gross income reduced by the amount of all the deductions attributable to specific activities.
(4) Examples. The method of determining the amount of taxable income attributable to an interest in a partnership, estate or trust, or subchapter S corporation is illustrated by the following examples:
Salary $3,000 Undistributed taxable income: Ordinary income 8,000 Net capital gain 2,000 Total 10,000 Total 13,000 Ordinary income 6,000 Net capital gain 4,000 Total 10,000 Gross income: Income from S Corporation $13,000 Income from other sources 10,000 Total 23,000 Less: Deductions attributable to specific activities: Section 1202 deduction (50 percent. of $6,000) 3,000 A’s gross income reduced by the amount of the deductions attributable to specific activities (denominator of the ratio for determining the proportionate share of deductions not attributable to a specific activity) 20,000 Income from S Corporation that A is required to include in gross income: Ordinary income $11,000 Net capital gain 2,000 Total 13,000 Less: Deductions of the taxpayer attributable to the interest in S Corporation: Section 1202 deduction (50 pct. of $2,000) 1,000 (Numerator of the ratio for determining the proportionate share of deductions not attributable to a specific activity) 12,000 Less: Proportionate share of the deductions of the taxpayer not attributable to a specific activity: Personal exemption deduction ($750 × $12,000/$20,000) 450 Zero bracket amount ($2,200 × $12,000/$20,000) 1,320 Total 1,770 Portion of A’s taxable income attributable to interest in S Corporation. 10,230 Ordinary income (other than guaranteed payment) $38,420 Guaranteed payment 20,000 Net long-term capital gain 6,000 Net short-term capital loss 2,000 Dividends qualifying for exclusion 100 Charitable contributions 500 Ordinary income $21,680 Short-term capital gain 2,000 Dividends qualifying for exclusion 400 Deductions: Deductible medical expenses 16,000 Charitable contributions 4,000 Alimony 18,000 Interest and taxes on home 8,000 Loss relating to another specific activity 4,000 Gross income: Income from the partnership: Ordinary income $58,420 Net long-term capital gain 6,000 Dividends 100 Less: Proportionate share of dividend exclusion ($100 × $100/$500) 20 80 64,500 Income from other sources: Ordinary income 21,680 Net short/term capital gain 2,000 Dividends 400 Less: Proportionate share of dividend exclusion ($100 × $400/$500) $80 320 24,000 88,500 Less: Deductions attributable to specific activities: Net short-term capital loss passed through the partnership 2,000 Loss related to another specific activity 4,000 Section 1202 deduction attributable to the interest in the partnership 2,000 Charitable contribution deduction passed through the partnership 500 8,500 C’s gross income, reduced by the amount of the deductions attributable to specific activities (denominator of the ratio for determining the proportionate share of deductions not attributable to a specific activity) 80,000 Distributive share of ordinary income (other than guaranteed payments) $38,420 Guaranteed payment 20,000 Distributive share of dividends less share of exclusion 80 Distributive share of net long-term capital gain 6,000 64,500 Section 1202 deduction (50 pct. of $4,000) 2,000 Charitable contribution passed through the partnership 500 Net short-term capital loss passed through the partnership 2,000 4,500 (Numerator of the ratio for determining the proportionate share of deductions not attributable to a specific activity) 60,000 Section 1202 deduction ($1,000 × $60,000/$80,000) 750 Deductible medical expenses ($16,000 × $60,000/$80,000) 12,000 Charitable contributions ($4,000 × $60,000/$80,000) 3,000 Alimony ($18,000 × $60,000/$80,000) 13,500 Interest and taxes on home ($8,000 × $60,000/$80,000) 6,000 Personal exemption deduction ($3,000 × $60,000/$80,000) 2,250 Total 37,500 Portion of C’s taxable income attributable to the interest in the partnership 22,500
(e) Deductions not attributable to a specific activity—(1) Specific activity defined. A specific activity means a course of continuous conduct involving a particular line of endeavor, whether or not the activity is carried on for profit. Examples of a specific activity are:
(i) A trade or business carried on by the taxpayer;
(ii) A trade or business carried on by an entity in which the taxpayer has an interest;
(iii) An activity with respect to which the taxpayer is entitled to a deduction under section 212;
(iv) The operation of a farm as a hobby.
(2) Types of deductions not attributable to a specific activity. Examples of deductions not attributable to a specific activity include charitable contributions made by the partner, beneficiary, or shareholder; medical expenses; alimony; interest on personal debts of the partner, beneficiary, or shareholder; and real estate taxes on the personal residence of the partner, beneficiary, or shareholder. For purposes of this section, in cases in which deductions are not itemized, the zero bracket amount is considered to be a deduction not attributable to a specific activity.
(f) Carryback or carryover of credit subject to separate limitation. A credit subject to the separate limitation under section 53(b) that is carried back or carried over to a taxable year beginning before January 1, 1979, is also subject to the separate limitation in the carryback or carryover year. For purposes of the preceding sentence, a credit that is earned by a partnership, a trust, or estate, or a subchapter S corporation in a taxable year of such entity ending within, or after, the taxable year of a partner beneficiary or shareholder beginning after December 31, 1978, will not be subject to the separate limitation in section 53(b) with respect to such partner, beneficiary, or shareholder. The taxpayer to whom the credit has been passed through shall not be prevented from applying the unused portion in a carryback or carryover year merely because the entity that earned the credit changes its form of conducting business if the nature of its trade or business essentially remains the same. The computation of the separate limitation in such a case shall reflect the income attributable to the taxpayer’s interest in the entity in its revised form. Thus, a shareholder carrying over a credit from a subchapter S corporation may include dividends declared by that corporation after the subchapter S election had been terminated as income attributable to that person’s interest in the entity. Similarly, if a partnership incorporates in a carryover year, any income attributable to an interest in the corporation will be regarded, for purposes of computing the separate limitation under section 53(b), as income attributable to an interest in the entity. This paragraph may be illustrated by the following examples: