Under California's historical child-care facility startup credit, how did the $50,000 annual cap interact with tax liability and carryovers?

Plain-English summary

California Legal Ruling 1993-2 explained that the historical child-care facility startup credit had two separate $50,000 limits.

First, even though the credit equaled 30% of qualified startup costs, no more than $50,000 of credit was allowed for a year. Second, the total credit used against tax in a later year—including both current-year credit and prior carryover—also could not exceed $50,000.

The amount carried forward was the allowed credit that exceeded the taxpayer's current tax liability. Expenses that produced a theoretical credit above the first $50,000 annual cap did not themselves create a carryover.

Basic calculation

Under sections 23617 and 17052.17 as described in the ruling:

1. Calculate 30% of qualified child-care facility startup expenses.
2. Limit the credit generated for that year to $50,000.
3. Apply the allowed credit against the year's tax.
4. Carry forward only the allowed credit that exceeds that tax.
5. In a future year, combine carryover and current-year credit, but use no more than $50,000 against tax for that year.

The ruling assumed that alternative minimum tax and AMT credit limitations did not apply.

Situation 1: enough tax to use the full credit

Corporation A spent $1,000,000 on one child-care facility. Thirty percent was $300,000, but the annual credit cap reduced the allowed credit to $50,000.

A had $70,000 of California tax after other credits. It used the full $50,000 child-care credit in year 1. Because the allowed credit did not exceed tax, nothing carried forward.

Situation 2: tax lower than the allowed credit

The qualified costs were the same, but A had only $10,000 of California tax after other credits.

A used $10,000 of the allowed $50,000 credit to reduce tax to zero, subject to payment of the minimum franchise tax stated in the ruling. The remaining $40,000 of the allowed credit carried forward.

The unused $250,000 difference between the theoretical $300,000 credit and the $50,000 annual cap did not carry forward.

Situation 3: carryover plus a new credit

In year 2, A had the $40,000 carryover from year 1 and spent another $100,000 on qualified startup costs. The new spending generated a $30,000 current-year credit.

The combined tentative amount was $70,000. A could use only $50,000 in year 2 because of the annual use cap, and the remaining $20,000 carried forward to year 3.

What this means for you

Employers and child-care facility sponsors

Under the historical credit, spending far more than the amount needed to generate $50,000 did not preserve the excess as a future credit. The cap applied before the carryover calculation.

Corporate taxpayers

Current tax liability determined how much of the allowed credit was used and how much carried forward. A zero post-credit tax did not eliminate the minimum franchise tax mentioned in Situation 2.

Accountants and tax professionals

Track three numbers separately: qualified costs, credit allowed after the generation cap, and credit usable after the annual tax-offset cap. Confirm that a current version of the credit exists and use the law for the actual tax year.

Common questions

Q: Did 30% of the $1 million cost create a $300,000 carryover?

A: No. The credit allowed for the year was capped at $50,000, so only unused portions of that $50,000 could carry forward.

Q: Why was there no carryover in Situation 1?

A: A's $70,000 tax was greater than the $50,000 allowed credit, so the entire credit was used.

Q: How was the $40,000 carryover in Situation 2 calculated?

A: The $50,000 allowed credit exceeded A's $10,000 tax by $40,000.

Q: Could A use all $70,000 available in Situation 3?

A: No. The total of current credit and carryover used in one year was capped at $50,000. The extra $20,000 carried to year 3.

Q: Did the ruling account for AMT limitations?

A: No. It expressly assumed AMT and AMT credit limitations did not apply.

Citations and references

• Cal. Rev. & Tax. Code §§ 23617, 17052.17, and 23036

Source

• Landing page: California FTB Legal Rulings
• Official HTML: Legal Ruling 1993-2

Original ruling text

Home

Legal ruling 1993-2

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

(---) --------

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

October 04, 1993

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

Child Care Facility Startup Expense Credit Limitations and Carryover

Issue

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?

Facts

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.

Holdings

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.

NOTE: ((---)) = Indicates obsolete information.

Last updated: 09/24/2025