Reg. § 1.1374-6 Credits and credit carryforwards.
(a) In general The credits and credit carryforwards allowed as credits against the section tax under section are allowed only to the extent their use is allowed under the rules applying to C corporations. Any other credits or credit carryforwards, such as foreign tax credits under section , are not allowed as credits against the section tax.
(b) Limitations The amount of business credit carryforwards and minimum tax credit allowed against the section tax are subject to the limitations described in section and section , respectively, as modified by this paragraph. The tentative tax determined under is treated as the regular tax liability described in sections and , and as the net income tax and net regular tax liability described in section . The tentative minimum tax described in section is determined using the rate of tax applicable to corporations and without regard to any alternative minimum tax foreign tax credit described in that section and by treating the net recognized built-in gain determined under , modified to take into account the adjustments of sections and applicable to corporations and the preferences of section , as the alternative minimum taxable income described in section .
(c) Examples The rules of this section are illustrated by the following examples.
Example 1. Business credit carryforward. X is a C corporation that elects to become an S corporation effective January 1, 1996. On that date, X has a $500,000 business credit carryforward from a C year and Asset #1 with a fair market value of $400,000, a basis for regular tax purposes of $95,000, and a basis for alternative minimum tax purposes of $150,000. In 1996, X has net recognized built-in gain of $305,000 from selling Asset #1 for $400,000. Thus, X's tentative tax under and regular tax liability under of this section is $106,750 ($400,000−$95,000 = $305,000 × .35= $106,750, assuming a 35 percent tax rate). Also, X's tentative minimum tax determined under of this section is $47,000 [$400,000−$150,000 = $250,000−$15,000 ($40,000 corporate exemption amount −$25,000 phase-out = $15,000) = $235,000 × .20 = $47,000, assuming a 20 percent tax rate]. Thus, the business credit limitation under section is $59,750 [$106,750−$47,000 (the greater of $47,000 or $20,438 (.25 × $81,750 ($106,750−$25,000 = $81,750))) = $59,750]. As a result, X's section tax is $47,000 ($106,750−$59,750= $47,000) for 1996 and X has $440,250 ($500,000−$59,750 = $440,250) of business credit carryforwards for succeeding taxable years.
Example 2. Minimum tax credit. Y is a C corporation that elects to become an S corporation effective January 1, 1996. On that date, Asset#1 has a fair market value of $5,000,000, a basis for regular tax purposes of $4,000,000, and a basis for alternative minimum tax purposes of $4,750,000. Y also has a minimum tax credit of $310,000 from 1995. Y has no other assets, no net operating or capital loss carryforwards, and no business credit carryforwards. In 1996, Y's only transaction is the sale of Asset #1 for $5,000,000. Therefore, Y has net recognized built-in gain in 1996 of $1,000,000 ($5,000,000−$4,000,000 = $1,000,000) and a tentative tax under of $350,000 ($1,000,000 × .35 = $350,000, assuming a 35 percent tax rate). Also, Y's tentative minimum tax determined under of this section is $47,000 [$5,000,000−$4,750,000 = $250,000−$15,000 ($40,000 corporate exemption amount −$25,000 phase-out = $15,000) = $235,000 × .20 = $47,000, assuming a 20 percent tax rate]. Thus, Y may use its minimum tax credit in the amount of $303,000 ($350,000−$47,000 = $303,000) to offset its section tentative tax. As a result, Y's section tax is $47,000 ($350,000−$303,000 = $47,000) in 1996 and Y has a minimum tax credit attributable to years for which Y was a C corporation of $7,000 ($310,000−$303,000 = $7,000).
[T.D. 8579, 59 FR 66469, Dec. 27, 1994]