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FAQs - Credit Assignment, Revenue and Taxation Code Section 23663

The finalized FAQs below provide additional information on the implementation and administration of Revenue and Taxation Code (R&TC) Section 23663.

If you have question regarding the FAQs, contact Leslie Tanaka at leslie.tanaka@ftb.ca.gov.

  1. The basics – what, who, when, and how
  2. The credit assignment election
  3. Unitary issues
  4. Restrictions – credit expirations and Enterprise Zone (EZ) limits
  5. Other

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A. The basics - what, who, when, and how

  1. What credits can be assigned?

    Any credit under Chapter 3.5 generated by the taxpayer in a taxable year beginning on or after July 1, 2008.

    Any credit under Chapter 3.5 generated in any taxable year beginning before July 1, 2008, that is eligible to be carried forward to the taxpayer’s first taxable year beginning on or after July 1, 2008.

    The assignor may also assign these credits if there is a carryover available from prior years. An example would be the Manufacturers' Investment Credit. For a listing of eligible credits, see credit chart in Form 100 and 100W booklets. The Alternative Minimum Tax Credit is excluded from the eligible credits because it falls under Chapter 2.5.

  2. Who can assign or receive credits?

    Assignor. The assignor is the taxpayer that originally generated the eligible credit (or is allowed the credit as a distributive share item) and assigned the credit to an eligible assignee. Any taxpayer-member of the combined reporting group that includes the eligible assignee is a possible assignor.

    Assignee. An eligible assignee is any affiliated corporation that is a member of the same combined reporting group (under RT&C Section 25101 or 25110) as the assignor on one of the following dates:

    1. June 30, 2008, and the last day of the taxable year in which the credit was assigned to the assignee, for credits generated in taxable years beginning before July 1, 2008.
    2. The last day of the taxable year in which the credit was first allowed to the assignor and the last day of the taxable year in which the credit was assigned to the assignee, for credits generated in taxable years beginning on or after July 1, 2008.

  3. Can the credit be assigned to a division?

    No. The credit cannot be assigned to a division if "division" is defined as a group of corporations in the same line of business within the entire combined reporting group. The assignor taxpayer can only assign to a specific corporation, not a group of corporations.

    A single owner eligible business entity (including a single member LLC) that is disregarded as an entity separate from its owner is treated as a division of the parent company of the disregarded entity. All of the expenses, receipts, property, etc., of the disregarded entity would then be treated as if they were the expenses, receipts, property, etc., of the owner. Special rules limit the amount of credit that can be used to offset tax to only the amount of tax attributable to the income of the otherwise disregarded entity. This limitation would apply to assigned credits as well.

    Special rules limit the amount of credit that can be used to offset tax to only the amount of tax attributable to the income of the otherwise disregarded entity. This limitation would apply to assigned credits as well.

    See Section D, Question 10 for information on limitations.

  4. When can credits be assigned?

    Credits can be assigned when taxpayers file their tax returns for taxable years beginning on or after July 1, 2008.

  5. When can the assigned credits be used to offset a tax liability of the assignee?

    Assigned credits can be used to offset an assignee's tax liability for taxable years that begin on or after January 1, 2010.

  6. How do credits get assigned?

    To assign a credit, taxpayers will file FTB 3544, Election to Assign Credit Within Unitary Group, to make an irrevocable election to assign credits to another member of the same combined reporting group. The form must be attached to the original return for the taxable year that the assignment is being made.

    The taxpayer will use one form per credit per assignor. If an assignor is assigning two different credits, two forms must be used. The credits must be listed by the taxable year they were first available to the assignor.

B. The credit assignment election

  1. When does the election have to be filed?

    The election must be filed with the original return for the tax year. The original return is the last return filed on or before the due date (taking extensions into account) or, if no return is filed by that date, the first return filed after such date.

  2. Does the assignor file FTB 3544 every year to report the balance of unassigned credits after a taxpayer makes an initial assignment?

    No. The assignor does not file Form 3544 every year to report the balance of the unassigned credits. This form 3544 is filed only in the year of the election.

  3. What if the assignment form is filed without being signed? Can the assignment be perfected?

    FTB 3544 will not require a separate signature. The signature on a taxpayer's original return will be sufficient to bind an assignor to the assignment it makes on FTB 3544. In other words, by filling out and attaching FTB 3544 to the assignor's signed original return, the assignor makes an irrevocable assignment of credit.

    If a key corporation files a single group return on behalf of several taxpayers, including the assignor, and attaches FTB 3544 to the original single group return, the key corporation's signature on that single group return is sufficient to effect the credit assignment reported on the 3544. As a result, the assignor and assignee specified on that 3544 form will be jointly and severally liable for any and all tax resulting from an audit of the credit being assigned.

  4. Can the election to assign credits be revoked?

    No. The election to assign credits is irrevocable.

  5. After an assignor assigns certain credits once, can the assignee assign those same credits to another entity, or even back to the assignor?

    No. Once credits get assigned, they cannot be reassigned.

  6. If an assignor assigns only part of the available credit, can it assign the remainder in a subsequent year?

    Yes. An assignor can assign part of its available credit as long as the credit has not expired. For example, Assignor A has a $100,000 R&D credit it can carry forward until 2013. In 2009, A assigns $20,000 to Assignee B. In 2010, A assigns $70,000 to Assignee C. A still has $10,000 it can assign to any eligible assignee until 2013.

  7. Can an assignor allocate a specific portion of the credit that it is assigning? (For example: Can an entity assign its EZ hiring credit solely related to the TEA employees? Or can an entity assign its MIC solely with respect to one particular asset? Or can an entity assign its R&D credit from a specific project?)

    No. "Eligible credits" cannot be assigned by reference to particular assets or employees upon which earning of the credit was based, but rather may only be assigned by specific dollar amount for each year. To do otherwise would impose a significant administrative burden upon the Franchise Tax Board (FTB) audit staff, is inconsistent with forms and instructions and calculations of existing credits, and is in conflict with current audit practices with respect to credits.

    Example 1: Assignor A has an Oakland enterprise zone hiring credit for having hired 100 qualified employees. Can A assign to Assignee B the portion of the credit that pertains to employees 1-50? No.

    Example 2: Assignor A has a Los Angeles enterprise zone hiring credit and an Oakland enterprise zone hiring credit. Assignor A wants to assign only the Oakland enterprise zone hiring credit to Assignee B. Can it do that? Yes, because the Oakland enterprise zone hiring credit is a separate credit from the Los Angeles enterprise zone hiring credit.

C. Unitary issues

  1. Does the assignee and assignor have to be unitary for the entire year of assignment?

    No. The assignee and assignor need to be part of the combined reporting group on the last day of the year in which the credit was first allowed and the last day of the year in which the credit is assigned for credits first allowed in taxable years beginning on or after July 1, 2008.

    The assignee and assignor need to be part of the combined reporting group on June 30, 2008, and the last day of the year in which the credit is assigned for credits first allowed in taxable years before July 1, 2008.

  2. If a corporation that has assigned credits leaves the combined reporting group, can the corporation take those credits?

    Yes. The corporation retains the credits and the limitations on the use of those assigned credits when leaving the combined reporting group. The corporation must be able to support the credit assignment if audited after leaving the combined reporting group. The corporation is also potentially liable for any increase in tax liability if all or part of the assigned credit is disallowed on audit of either the assignee or assignor.

  3. A parent sells a unitary subsidiary on April 1, 2010. When the subsidiary files its short year period return ending on March 31, 2010, can the subsidiary assign the unused credit to its parent even though the parent corporation does not have a March 31 filing requirement?

    Yes. Under R&TC Section 23663(b)(3), an “eligible assignee” is any affiliated corporation that is properly treated as a member of the same combined reporting group pursuant to 25101 or 25110 as the taxpayer assigning the eligible credit as of: (i) June 30, 2008, and the last day of the taxable year in which the credit was assigned to the assignee, or (ii) The last day of the taxable year in which the credit was first allowed to the assignor and the last day of the taxable year in which the credit was assigned to the assignee. Although the parent corporation does not file a March 31 return, eligible assignee is “a member of the same combined reporting group pursuant to 25101 or 25110 as the taxpayer assigning the eligible credit”.

  4. What happens if FTB determines that the assignee receiving the credit assignment is not unitary with the assignor on the required dates for a valid assignment?

    The assignment is invalid and the credit goes back to the assignor for future use, as if the election had not been made. The credit will be carried forward to a year subsequent to the failed assignment election year, and the assignor can either file an amended return to claim the credit for itself (assuming the statute of limitations is still open), or the assignor can assign the credit on an original return for a subsequent year if the credit has not expired.

  5. If FTB determines that a taxpayer should have included a certain entity in the taxpayer's combined report for a certain year, can the taxpayer amend its return for that year to assign a credit to that entity?

    The taxpayer cannot file an amended return to retroactively assign a credit. However, if the credit has a valid carryover to subsequent years, the taxpayer can assign the credit in a subsequent year, on the taxpayer's original return for that subsequent year.

    For example: In 2012, FTB determines that the taxpayer should have included subsidiary A in its combined report for 2009. The taxpayer cannot amend its 2009 return to assign a credit to A. However, if the credit has a valid carryover to 2012, the taxpayer can assign the credit to A in the taxpayer's original 2012 return.

  6. After an assignee with an assigned credit leaves the combined reporting group, FTB determines that the assignor's credit available for use or assignment is lower than the assignor reported at the time of the assignment. Who is responsible for any additional tax as a result?

    The assignor and the assignee shall each be liable for the full amount of any tax, addition to tax, or penalty that results from any disallowance of any credit assigned under R&TC Section 23663, and FTB may collect such amount in full from either the assignor or the assignee.

  7. An assignee with an assigned credit leaves the combined reporting group. FTB audits the assignee after it leaves the group. The assigned credit was used to reduce or eliminate that assignee's tax liability. The assignee did not receive any of the supporting documentation for the credit assigned. Can FTB deny the credit if the assignee cannot provide support that the credit was properly computed?

    Yes. An assignee, just like any other taxpayer, has the burden to prove they are entitled to use a credit and that the credit has been properly calculated.

D. Restrictions - credit expirations and Enterprise Zone (EZ) limits

  1. Are there restrictions on the use of the assigned tax credits by an assignee?

    Yes. Section 8 of SX1 28 (Stats. 2008, 1st Ex. Sess. 2008, ch. 1) clarifies that any limitations on allowance of any credit against the “tax” that would apply to the assigning taxpayer in the absence of an assignment shall also apply to the same extent to the allowance of that assigned credit against the “tax” of the eligible assignee.

    This means that any limitations on the use of a tax credit that would have been placed on the assignor will apply to the assignee. This would include credit expiration dates, EZ income requirements, any IRC Section 383 limitations, or any other limitations on the allowance of the tax credit that would have applied to the assignor.

  2. Does a credit assignment affect the credit's carryover period?

    No. The carryover period carries through to the assignee. If a credit expires for the assignor in 2012, it will expire for the assignee in 2012.

  3. If a corporation has an "eligible credit," and the assets of such corporation are acquired by another corporation in a transaction to which IRC Section 381 applies, will such acquisition of assets also constitute an assignment of an "eligible credit" for purposes of RT&C Section 23663?

    No. However, if such an acquisition occurred, and limitations under IRC Section 383 applied to any acquired credits, such limitations would apply to the "eligible assignee" following any subsequent assignment of such credits under R&TC Section 23663.

  4. In calculating the amount of some credits, a taxpayer will lose a deduction or reduce an amount of capitalized costs as a result of determining the credit. When such a credit is assigned, will the assignee also have to make a similar adjustment when it receives an assigned credit?

    No. Such expense and capitalization adjustments should have occurred when the original entity earned the credit.

  5. Can the assignment exceed the amount the assignor would have been able to claim in the year of assignment?

    Yes. The amount an assignor may assign does not depend on how much of the eligible credit the assignor may claim in the year of assignment. For example: A taxpayer had $100 of MIC carryover and $100 of EZ hiring credit. Their tax liability for 2010 was $50. They use $50 of MIC to offset their tax liability and have available balances of $50 MIC and $100 of EZ hiring credit. The taxpayer could assign all or part of these available balances.

  6. Since Enterprise Zone tax credits from a particular Enterprise Zone may only offset tax from income attributable to the particular Enterprise Zone, does the assignee look at its own income attributable to the Enterprise Zone or the assignor's income attributable to the Enterprise Zone?

    To determine the amount of credit allowed to reduce tax, the assignee must look to its own income attributable to the Enterprise Zone, based on its own factors, in the year the assignee seeks to use the Enterprise Zone credits.

  7. If an EZ credit assignee also generates an EZ credit on its own, would it have to compute two separate EZ income limitations (e.g., assignee's EZ income limitation applied to credit it generated on its own vs. assignor's EZ income limitation applied to credit the assignee received from the assignor)?

    No. The assignee would only have to compute one EZ limitation based on the EZ factors for the year the assignee is trying to use the credit, whether the credit at issue is a generated credit or an assigned credit.

  8. Does the credit expiration date for the original owner apply to the assignee?

    Yes. The same credit expiration date that applies to the assignor also applies to the assignee. If the assignee is not able to use the credit before the expiration date, the credit is no longer available to offset tax.

  9. Would an entity that is assigned an R&D credit have to be engaged in qualified research in order to be able to use the assigned R&D credit?

    No. Even the original entity that generated the credit does not need to be engaged in qualified research at the time it uses the R&D credit, only at the time when the credit is earned. Therefore, there is no reason to require the assignee to be engaged in qualified research in order to be able to use the assigned R&D credit.

  10. If subdivision (i) of R&TC Section 23036 applies to the tax credits of a corporation, will such limitation apply to an eligible assignee following the assignment of such tax credits to the eligible assignee?

    Yes. Section 8 of SX1 28 (Stats. 2008, 1st Ex. Sess. 2008, ch.1) clarifies that any limitation on allowance of any credit against the "tax" that would apply to the assigning taxpayer in the absence of an assignment shall also apply to the same extent to the allowance of that assigned credit against the "tax" of the eligible assignee.

    The limitation in subdivision (i) of R&TC Section 23036 limits the amount of any credit which may be applied to reduce "tax" when the credit is attributed to a disregarded business entity. As a result of this limitation, the amount which a taxpayer may apply against its "tax" is equal to the amount of the taxpayer’s regular tax attributed to the income of the disregarded entity. The statute achieves this result by requiring the taxpayer to determine its regular tax, determined by including income of the disregarded business entity, and to determine the taxpayer’s regular tax, determined by excluding income of the disregarded business entity. If the taxpayer’s regular tax, determined by including such income, is greater than the taxpayer’s regular tax, determined by excluding such income, the taxpayer is entitled to apply the difference between such amounts against the taxpayer’s "tax." If the taxpayer’s regular tax, determined by including such income, is less than the taxpayer’s regular tax, determined by excluding such income, no amount of the credit would be allowed to be applied against the taxpayer’s "tax" for the taxable year.

    When a credit subject to the limitation under subdivision (i) of R&TC Section 23036 has been validly assigned under R&TC section 23663, the assignee is required to determine the amount of the assignee’s regular tax, determined by including income of the disregarded business entity, and then determine the amount of the assignee’s regular tax, determined by excluding income attributed to the disregarded business entity. If the assignee’s regular tax, determined by including such income, is greater than the assignee’s regular tax, determined by excluding such income, the assignee is entitled to apply the difference between such amounts against the assignee’s "tax." If the assignee’s regular tax, determined by including such income, is less than the assignee’s regular tax, determined by excluding such income, no amount of the credit would be allowed to be applied against the assignee’s "tax" for the taxable year.

    If the assignee is not the single member of the disregarded business entity, then there will be no difference in the separate calculations required under subdivision (i), and the limitation under subdivision (i) will prevent the assignee from applying the assigned credit against the assignee’s "tax".

  11. Do the credit assignment provisions under R&TC Section 23663 over ride the assignment provisions of R&TC Sections 23610.5(q) (Low Income Housing Tax Credit) and R&TC Section 23685 (California Film & Television Tax Credit)?

    No. Provisions permitting assignment of tax credit in R&TC Section 23663 do not prohibit or restrict assignment or sale of tax credits under R&TC Section 23610.5(q) or R&TC Section 23685.

E. Other

  1. Can a credit be purchased?

    An agreement between the assignor and assignee can include compensation or remuneration to receive credits by assignment. For California purposes, there are no tax consequences, but there may be federal tax consequences.

  2. If Company A assigns unused credits to Company B for $100,000 and both are members of the same combined group, are there any non-California related tax consequences?

    It is possible there may be federal or other state income tax consequences as a result of the entity using the assigned credit, as well as income from “selling” the credits to a related entity.

  3. If Assignor A has $100 of available credit and assigns $60 of the credit to Assignee B, and FTB later determined that Assignor A only has $50 available credit in 2008 to assign, how is FTB going to disallow the credit? Will the credit be disallowed from Assignor A first, from Assignee B first, or on a pro-rata basis?

    Assignor A and Assignee B are jointly and severally liable for any tax, addition to tax, or penalty resulting from the disallowance of any "eligible" credit. Any disallowance of the credit, including credit carryovers, will be considered on a case-by-case basis.