Information Release

CAT 2006-06 - Commercial Activity Tax Credit for Unused Franchise Tax Net Operating Losses - Issued April, 2006 

 Introduction

As explained in more detail below, the commercial activity tax (CAT) credit for franchise tax net operating losses applies only if (1) the taxpayer filed its 2005 franchise tax report on a separate company basis and after such filing the taxpayer’s accumulated Ohio franchise tax net operating loss (NOL) carryforward exceeds $50 million; or (2) the taxpayer filed its 2005 franchise tax report as a member of a combined return and after such filing the sum of the accumulated Ohio franchise tax NOL carryforwards for all of the 2005 combined group’s members exceeds $50 million.

Click here to view the proposed Ohio Adm. Rule 5703-29-11.

Explanation

The CAT credit for unused Ohio franchise tax NOLs applies to “qualifying taxpayers” that elect to claim the credit by filing with the Tax Commissioner before July 1, 2006, a report setting forth the taxpayer’s amortizable amount* along with any related information which the Tax Commissioner requires by rule. A qualifying taxpayer making the election can ratably claim the amortizable amount as a credit against one-half the taxpayer’s CAT liability in each of the years 2010 through 2019. Note: The Tax Commissioner can audit and adjust the taxpayer’s amortizable amount until June 30, 2010. However, that date can be extended by agreement between the taxpayer and the Tax Commissioner. See R.C. 5751.53(B) and (D).

Footnote: (note: release continued after footnote)

*Terms in bold print are defined in this information release.

(continued)

A qualifying taxpayer is either of the following:

  • A CAT taxpayer that filed its 2005 franchise tax report on a separate company basis (that
    is, the taxpayer was not a member of a 2005 combined franchise tax report), and after
    such filing (or after filing an amended report before July 1, 2006) the taxpayer’s
    accumulated Ohio franchise tax NOL carryforward is at least $50 million; or
  • A CAT taxpayer that filed its 2005 franchise tax report as a member of a combined
    franchise tax group, and after such combined filing (or after filing amended combined 2005
    franchise tax reports before July 1, 2006) the sum of the accumulated Ohio franchise tax
    NOL carryforwards for all members of the group is at least $50 million. See R.C. 5751.53
    (A)(4) and (A)(11).

Note: If the taxpayer includes with the R.C. 5751.53(D) amortizable amount report the NOL schedule required in The Amortizable Amount Report , item #4, of this information release, then the taxpayer’s Ohio NOL carryforward from 2005 to 2006 as reflected on the schedule is deemed to have been “ . . . reported by the taxpayer either on a franchise tax report for franchise tax year 2005 pursuant to section 5733.02 of the Revised Code or on an amended franchise tax report prepared in good faith for such year and filed before July 1, 2006.” See R.C. 5751.53(A)(5) and Claiming the Credit in this information release.

 

The amortizable amount (see R.C. 5751.53(A)(9)) is computed as follows:

 

Amortizable

amount

 

=

 

.08 

 

x

(

Disallowed Ohio NOL carryforward

 

+

Other net deferred tax items apportioned to Ohio

)

 

The disallowed Ohio NOL carryforward (see R.C. 5751.53(A)(6)) is computed as follows:
 

 Disallowed Ohio NOL carryforward  =  Applicable Ohio NOL carryforward
− Qualifying amount 
 


Applicable Ohio NOL carryforward.
As used in computing the qualifying taxpayer’s disallowed Ohio NOL carryforward, the taxpayer’s applicable Ohio NOL carryforward equals the smallest of the three amounts described below:  

  1. The Ohio NOL that Ohio law would allow the taxpayer to claim as a carryforward deduction
    on its 2006 franchise tax report if the taxpayer had not elected to claim the CAT credit for
    franchise tax NOLs (a taxpayer elects to claim the credit by filing the report setting forth
    the taxpayer’s amortizable amount). See R.C. 5751.53(A)(5).
  2. The Ohio NOL that (a) the taxpayer actually reported on the taxpayer’s 2005 franchise
    tax report as a carryforward to 2006; or (b) the taxpayer reported on the schedule of
    Ohio NOL's included with the election to claim the CAT credit for franchise tax NOLs
    and the report that sets forth the taxpayer’s amortizable amount. See R.C. 5751.53(A)(5)
    and The Amortizable Amount Report in this information release.
  3. The Ohio NOL carryforward that the taxpayer used to compute the related deferred tax
    asset reflected on the taxpayers books and records on the last day of its taxable year
    ending in 2004. This amount must be adjusted for return to accrual and reduced by the
    qualifying related valuation allowance amount. The “qualifying related valuation allowance
    amount” is the amount of Ohio NOL reflected in the qualifying taxpayer's computation of
    the valuation allowance account with respect to the deferred tax asset relating to the
    taxpayer’s Ohio NOL carryforward amount, as shown on the taxpayer’s books and
    records on the last day of the taxpayer’s taxable year ending in 2004.
    See R.C. 5751.53(A)(6)(b).

Qualifying amount (see R.C. 5751.53(A)(11)).  A qualifying taxpayer’s qualifying amount depends on whether the taxpayer was a member of a 2005 combined franchise tax report:
 

  • If the qualifying taxpayer was not a member of a 2005 combined franchise tax report, the
    taxpayer’s qualifying amount is $50 million.
  • If the qualifying taxpayer was a member of a 2005 combined franchise tax report, the
    taxpayer’s qualifying amount is that portion of $50 million which the combined franchise
    group assigns to the taxpayer. The total amount allocated to the members of the
    combined franchise tax group that are CAT taxpayers must equal $50 million.
    (Taxpayers that were members of a combined 2005 franchise tax report are qualifying
    taxpayers if, after filing their 2005 franchise tax reports or after filing amended 2005
    franchise tax reports before July 1, 2006, the sum of the accumulated Ohio NOL
    carryforwards for all members of the combined group is at least $50 million.)

Other net deferred tax items apportioned to Ohio (see R.C. 5751.53(A)(7)) is computed as follows:

Other Net Deferred Tax Items Apportioned to Ohio

  =

Other net deferred tax items

  x

2005 franchise tax
apportionment ratio


Limitation:
For purposes of computing a qualifying taxpayer’s amortizable amount the taxpayer’s other net deferred tax items apportioned to Ohio cannot exceed 25% of the qualifying taxpayer’s qualifying NOL carryforward. The taxpayer’s qualifying NOL carryforward is the smaller of the amounts described in (1) and (2), above. See R.C. 5751.53(A)(5) and (A)(8)(d).

 

Other net deferred tax items

 =

Deductible temporary differences (net of related valuation allowance amounts)

 Taxable temporary    differences

 

The terms "deductible temporary differences" and "taxable temporary differences" have the same meaning as for purposes of paragraph 13 of the Statement of Financial Accounting Standards number 109. Deductible temporary differences and taxable temporary differences are determined from the taxpayer’s books and records as of the last day of the taxpayer’s taxable year ending in 2004. See R.C. 5751.53(A)(3).

With respect to the calculation of the taxpayer’s other net deferred tax items, the following amounts are excluded from deductible temporary differences to the extent otherwise included in the taxpayer’s deductible temporary differences:    

  1. The taxpayer’s unused franchise tax credit carryforwards (as reflected on the taxpayer’s
    books and records on the last day of the taxpayer’s taxable year ending in 2004);
  2. The taxpayer’s disallowed Ohio NOL carryforward.
    See R.C. 5751.53(A)(8).

Caution:  With respect to the amortizable amount calculation, other net deferred tax items can be a negative number; if so, the taxpayer must subtract from the taxpayer’s disallowed Ohio NOL carryforward the absolute value of that number multiplied by the taxpayer’s 2005 Ohio apportionment ratio. However, that subtraction cannot result in an amortizable amount of less than zero. (Thus, a negative credit is not possible.) See R.C. 5751.53(A)(8)(a) and (A)(9).

                                                     Franchise Tax Adjustments

For franchise tax years 2006 and thereafter qualifying taxpayers electing to claim this credit may not claim the disallowed Ohio NOL carryforward as a franchise tax NOL deduction (hence the statutory term “disallowed Ohio net operating loss carryforward”). However, since not all of a qualifying taxpayer’s Ohio NOL carryforward is disallowed under the above formula, the portion which is not disallowed remains available for use on the taxpayer’s 2006 and subsequent years’ franchise tax reports. See R.C. 5751.53(H)(1).

Having elected to claim the CAT credit for unused franchise tax net operating losses, a qualifying taxpayer must make the following net income base adjustments for franchise tax years 2006 and thereafter: 

  1. For a taxable year in which for federal income tax purposes the taxpayer recognizes
    a deductible temporary difference, the taxpayer must add to federal taxable income the
    deductible temporary difference. See R.C. 5751.53(H)(2) and form FT-1120, Schedule B,
    line 1(g).
  2. For a taxable year in which for federal income tax purposes the taxpayer recognizes
    a taxable temporary difference, the taxpayer must subtract from federal taxable income
    the taxable temporary difference. Nevertheless, the deduction required by the second
    adjustment may not exceed the add-back required by the first. See R.C. 5751.53(H)
    (3) and form FT-1120, Schedule B, line 2(j).

The above two adjustments apply only to the extent such adjustments were used in the calculation of the amortizable amount.

                                                  The Amortizable Amount Report

Taxpayers intending to claim the CAT credit for unused franchise tax NOLs must file with the Tax Commissioner before July 1, 2006 a report setting forth the taxpayer’s “amortizable amount.” If the taxpayer does not timely file the report, the taxpayer cannot claim the credit (see R.C. 5751.53(D)). Send the report to the following address: 

                                                                Ohio Department of Taxation

                                                                CAT Division-CAT NOL

                                                                P.O. Box 530

                                                                Columbus,Ohio 43216-0530

As an alternative you can fax the completed form to 206-666-4462.

The taxpayer must include the following information on the report:

  1. The taxpayer’s name, address, federal employer identification number and Ohio charter or license number;
  2. A schedule listing each of the terms shown in bold print in this information release and the taxpayer’s corresponding amount for each of those terms;
  3. If the taxpayer was a member of a 2005 combined franchise tax report, the name, address, federal employer identification number and Ohio charter or license number for each of the other members of the 2005 combined franchise tax report along with each member’s qualifying amount;
  4. A schedule of Ohio NOLs that would have been available for use on the taxpayer’s 2006 franchise tax report had the taxpayer not elected to claim this credit. Include in the schedule the following:
    • Ohio NOLs actually reported on the taxpayer’s franchise tax reports filed for tax years 2005 and earlier;
    • Ohio NOLs actually reported on the taxpayer’s amended franchise tax reports, if any, filed for tax years 2005 and earlier;
    • Corrections, if any, to Ohio NOLs actually reported on the taxpayer’s franchise tax reports or amended franchise tax reports filed for tax years 2005 and earlier;
    • Ohio NOLs for tax years 2005 and earlier not previously reflected on the taxpayer’s franchise tax reports or amended reports filed for tax years 2005 and earlier;
    • The taxable year in which the loss was generated;
    • The amount of the Ohio NOL generated in that year;
    • The taxable year(s) in which the taxpayer used any portion of the loss carried forward;
    • The amount of Ohio income in each subsequent year (and corrections to Ohio income in each subsequent year);
    • The amount of loss used in each year subsequent to the loss year;
    • The taxpayer’s total Ohio NOL carryforward that would have been available for use on the taxpayer’s 2006 report if the taxpayer had not elected to claim this credit.  Note: the NOL carryforward period set forth in R.C. 5733.04(I)(1)(b) applies; 
    • If the taxpayer is claiming Ohio NOLs of a transferor corporation pursuant to R.C. 5733.053(D)(2), identify the transferor corporation and the date of the transfer.

R.C. 5751.53(A)(5) requires each taxpayer electing the credit to show on its 2005 franchise tax report or on an amended 2005 franchise tax report filed before July 1, 2006 the taxpayer’s Ohio net operating loss carryforward that the taxpayer could deduct in whole or in part for franchise tax year 2006. However, the Tax Commissioner has announced that taxpayers who did not show on their original 2005 franchise tax report the loss carryforward available for 2006 are not required to file an amended 2005 franchise tax report before July 1, 2006 if the taxpayer includes with the timely filed “amortizable amount report” the schedule required in item #4 above.

                                                           Claiming the Credit

Qualifying taxpayers electing the credit (by filing with the Tax Commissioner before July 1, 2006 a report setting forth the taxpayer’s amortizable amount) may claim 10% of the amortizable amount as a nonrefundable credit against the CAT in each of the calendar years 2010 through 2019. For each year in which the taxpayer claims the nonrefundable credit, the taxpayer may apply the credit against only one-half of the CAT liability remaining after the liability is first reduced by the nonrefundable credits that precede this credit in the order set out in R.C. 5751.98. Any portion of the 10% amortizable amount not used in the year that it otherwise could have been claimed may be carried forward and claimed in the following year or years through 2029. Any portion of the nonrefundable credit not claimed by 2029 may be claimed as a refundable credit against the CAT in calendar year 2030. See R.C. 5751.53(B) and (C).

Please direct any questions you may have to the Business Tax Division of ODT at 1-614-387-0232.