Can an S corporation carry forward research and development tax credits it earned during a year when it wasn't subject to Article 9-A tax, to a later year after it becomes a regular C corporation again?

Subject

Whether research and development tax credits earned by an S corporation in a taxable year beginning before December 31, 1982 can be carried forward by that corporation to taxable years when the S election is revoked.

Plain-English summary

Diagnostic Medical Instruments, Inc. was an S corporation for its fiscal year running October 1982 through September 1983, and earned $17,212 in research and development tax credits that year. Those credits were originally passed through to the shareholders for use on their 1983 personal returns — but in 1986 the Department told the shareholders that the 1982-era Tax Law didn't actually allow R&D credits to pass through to S-corp shareholders (that pass-through wasn't authorized until a 1984 law change effective for years after 1982). With the shareholders' credit disallowed, the corporation argued the unused credit should instead belong to it, carried forward to a later year after it dropped its S election and became a regular Article 9-A ("C corporation") taxpayer.

The Department said no. During the fiscal year the credit was earned, the corporation's federal S election was also in effect for New York purposes, meaning it wasn't an Article 9-A "taxpayer" at all that year — Tax Law § 209.8 exempts S corporations from Article 9-A tax entirely while the election is in effect. Since the carryforward statute (§ 210.18) only lets a taxpayer carry forward credit amounts it couldn't use in a year it was actually taxed, and there's no provision allowing a carryforward of a credit computed for a year the corporation wasn't an Article 9-A taxpayer, the credit was simply lost — it couldn't go to the shareholders (the law hadn't yet allowed that pass-through) and it couldn't be banked by the corporation for later years either.

What this means for you

S corporations claiming R&D or similar Article 9-A credits

A credit computed for a year your corporation was an S corporation (and therefore not an Article 9-A taxpayer) generally cannot be carried forward to a year you later become a C corporation again. If pass-through to shareholders is also unavailable for that year, the credit can be lost entirely — there's a gap where neither the corporation nor the shareholders can use it.

Accountants and tax professionals

This turns on the interaction between § 208.2's definition of "taxpayer" (a corporation subject to Article 9-A tax), § 209.8's blanket exemption of S corporations from Article 9-A during the election, and § 210.18's carryforward mechanism, which presupposes the credit was computed for a year the corporation was actually a taxpayer. Watch for similar gaps with other Article 9-A credits computed during S-corporation years, especially for years before a given credit's shareholder pass-through provision was enacted.

Common questions

Q: Can an S corporation's unused R&D credit be carried forward once it becomes a C corporation?
A: Not if the credit was computed for a year the corporation was an S corporation — during that year it wasn't an Article 9-A "taxpayer," and the carryforward statute doesn't cover credits from non-taxpayer years.

Q: Could the shareholders have used the credit instead?
A: Not here — the pass-through of R&D credits to S-corp shareholders wasn't authorized under New York law until Tax Law § 606(i), effective for taxable years beginning after December 31, 1982, and the credit year here began October 1, 1982.

Q: Can another S corporation rely on this ruling?
A: No. This advisory opinion binds the Department only for the taxpayer and facts presented, and cannot be relied on by anyone else.

Citations and references

Statutes and regulations:

• Tax Law § 210.18 (research and development tax credit and its carryforward mechanism)
• Tax Law § 208.2 (definition of "taxpayer" under Article 9-A)
• Tax Law § 209.8 (S corporations not subject to Article 9-A tax while the election is in effect)
• Tax Law § 606(i), added by L 1984, ch 606 (R&D credit shareholder pass-through, effective for taxable years beginning after December 31, 1982)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a90_4c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90(4)C
Corporation Tax
February 8, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C891020A

On October 20, 1989, a Petition for Advisory Opinion was received from Diagnostic Medical
Instruments, Inc., 6724 Thompson Road, Syracuse, New York 13211.
The issue raised by Petitioner, Diagnostic Medical Instruments, Inc., is whether research and
development tax credits earned by an S corporation in a taxable year beginning before December 31,
1982 can be carried forward by such corporation to taxable years when the S election is revoked.
Petitioner was an electing Small Business Corporation (S corporation) for the fiscal year
beginning October 1, 1982 and ending September 30, 1983. During that year Petitioner earned
$17,212 in research and development tax credits pursuant to section 210.18 of the Tax Law.
Originally, these credits were passed through to the shareholders for utilization on their 1983
personal income tax returns. However, around September of 1986, the New York State Department
of Taxation and Finance notified each shareholder that the 1982 Tax Law did not allow for the pass
through of research and development tax credits to the shareholders. Accordingly, the shareholders
returns were adjusted for this credit previously taken. Petitioner contends that these research and
development tax credits belong to Petitioner and, if unavailable for pass through to its shareholders,
rightfully exist as a tax credit carryover to a year when Petitioner has terminated its S corporation
status and now is taxed as a regular Article 9-A taxpayer.
It is Petitioner's position that research and development tax credits applicable to fiscal year
ended September 30, 1983 should be reflected as a component of the current research and
development tax credit carryover position pursuant to section 210.18(e) of the Tax Law.
S corporation shareholder provisions, under Article 22 of the Tax Law, were amended by
Chapter 606 of the Laws of 1984 which added a new section 606(i) of the Tax Law, effective for
taxable years beginning after December 31, 1982, wherein research and development tax credits are
now available for pass through to the shareholders.
For the taxable year ended September 30, 1983, section 210.18(a) of the Tax Law provides
that a taxpayer shall be allowed a credit against the tax imposed by Article 9-A of the Tax Law with
respect to qualifying property used or to be used for purposes of research and development in the
experimental or laboratory sense. Such credit is allowable in the taxable year that the property
becomes qualified. However, the credit allowed for any taxable year shall not reduce the tax due for
such year to less than the fixed minimum tax. When the amount of credit allowable reduces the tax
to the fixed minimum, any amount of credit not deductible in such taxable year may be carried
forward to the following year or years and may be deducted from the taxpayer's tax for such year or
years.
TP-9 (9/88)

-2­
TSB-A-90(4)C
Corporation Tax
February 8, 1990

Section 208.2 of the Tax Law provides that the term "taxpayer" means any corporation
subject to tax under Article 9-A.
Section 209.8 of the Tax Law provides that a taxpayer which is an S corporation for federal
income tax purposes shall not be subject to tax under Article 9-A of the Tax Law for any taxable year
for which an election is in effect pursuant to section 660 of the Tax Law.
Herein, for taxable year beginning October 1, 1982 and ending September 30, 1983, the
election under section 660 of the Tax Law was in effect and Petitioner was not subject to tax under
Article 9-A. There is no provision in section 210.18 of the Tax Law to allow a carryforward of a tax
credit computed for a taxable year during which a corporation was not subject to tax under Article
9-A.
Accordingly, Petitioner may not carryforward a research and development tax credit
computed for taxable year ended September 30, 1983, even though Petitioner is now an Article 9-A
taxpayer.

DATED: February 8, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.