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CAT 2007-03 - Commercial Activity Tax: Commercial Activity Tax Credits, Explained - Issued December 2007

This is a draft rule to assist taxpayers in determining the credits available for purposes of the commercial activity tax (CAT). Prior to adopting a rule to explain the different types of CAT credits, the Ohio Department of Taxation (ODT) is seeking public comment on the draft of that rule. Public comment on this rule should be made to Sarah Hedman by e-mail at sarah_hedman@tax.state.oh.us or by calling her at (614) 644-5764. Please direct any questions to the CAT Division of ODT at 1-888-722-8829.

Please make any comments directly related to this proposed rule by the end of the business day on January 11, 2008.

Reason for rule.

The Tax Commissioner promulgates this rule to identify the different credits available to taxpayers for commercial activity tax purposes and to explain the proper method for taxpayers to claim those credits against their commercial activity tax liability.

Draft of Rule 5703-29-22 Explanation of the commercial activity tax credits.

(A)(1) For purposes of the commercial activity tax, the law provides for five different credits taxpayers may apply against their tax liability: (a) a nonrefundable jobs retention credit; (b) a nonrefundable credit for qualified research expenses; (c) a nonrefundable credit for a borrower’s qualified research and development loan payments; (d) a credit for unused franchise tax net operating loss deductions; and (e) a refundable jobs creation credit. The jobs retention credit, the credit for qualified research expenses, the credit for a borrower’s qualified research and development loan payments, and the jobs creation credit are all available under the franchise tax through tax year 2008 (the taxpayer’s taxable year ending in 2007). Those credits are available under the commercial activity tax starting January 1, 2008; however, a taxpayer may not apply those credits against the taxpayer’s commercial activity tax liability until the tax period July 1, 2008 to September 30, 2008, the return for which is due November 9, 2008. A taxpayer may not begin applying the credit for unused net operating losses until tax year 2010, and that credit operates as both a refundable and a nonrefundable credit depending on the year in which the taxpayer claims the credit. In any event, a taxpayer may not claim as a credit against the commercial activity tax any credit amount that such taxpayer previously claimed as a credit against the corporation franchise tax or, if applicable, any credit amount that a pass-through entity passed through to its owners. In addition, in no event may a taxpayer claim a nonrefundable credit against its commercial activity tax annual minimum tax liability.

(2) In the event a taxpayer is entitled to claim more than one nonrefundable credit against its commercial activity tax liability, section 5751.98 of the Revised Code dictates the order in which such taxpayer must claim each credit. The order is particularly important if, in the year the taxpayer generates the nonrefundable credits, the taxpayer is unable to use some portion of the total credit available (because the total credit amount exceeds the tax due before credits). Generally, a taxpayer may carry forward to future years any nonrefundable credits not used in the year generated; however, the carryforward period is limited and varies from credit to credit. After the carryforward period for a particular credit expires, any credit amount that remains unused is lost. The unused amount of a particular credit carried forward to a later year must be used after any lower numbered credit listed in section 5751.98 of the Revised Code but prior to the same credit generated in the later year and prior to any higher numbered credit listed in that section. The chart below reflects for each credit the code section that authorizes the credit, the carryforward period that relates to the credit, and the first year that taxpayers may use the credit. The credits are listed in the table in the order in which they must be claimed.

Credit

Refundable or Nonrefundable

Ohio Revised Code Section

Carryforward Period

First Period Credit Can Be Used Against the CAT

Jobs Retention Credit

Nonrefundable

5751.50(B) & 122.171

Three Years

Period beginning July 1, 2008

Credit for Qualified Research Expenses

Nonrefundable

5751.51

Seven years

Period beginning July 1, 2008

Credit for R&D Loan Payments

Nonrefundable

5751.52

Unlimited

Period beginning July 1, 2008

Credit for Unused NOLs

Nonrefundable

5751.53

Nineteen years

2010

Credit for Unused NOLs

Refundable

5751.53 & 122.17

N/A

2030

Jobs Creation Credit

Refundable

5751.50(A) & 122.17

N/A

Period beginning July 1, 2008

(3) In the event a taxpayer claims any credit against the commercial activity tax, the taxpayer must complete a schedule promulgated by the tax commissioner for such purpose. The schedule shall include identifying information that links the primary/reporting entity to the member claiming the credit, including the primary/reporting entity’s name and address, commercial activity tax account number, and federal identification number, as well as the name(s) and account number(s) of those entities claiming the credit, if applicable. On the schedule, the taxpayer must indicate the amount of each credit the taxpayer claimed for that period.

(B)(1)(a) Pursuant to division (B) of section 5751.50 of the Revised Code, the nonrefundable jobs retention tax credit is available under section 122.171 of the Revised Code to certain eligible businesses that propose capital investment projects to retain jobs in Ohio. An eligible business may make an application to the tax credit authority to be considered for a nonrefundable jobs retention tax credit.

(b) Any credit granted under section 122.171 of the Revised Code may be applied against Ohio’s corporation franchise tax, personal income tax, or commercial activity tax for a period of up to fifteen years, depending on the terms of the agreement with the tax credit authority. A taxpayer may carry forward any unused credit for not more than three years after the year in which the credit is granted.

(2)(a) A taxpayer claiming a nonrefundable jobs retention tax credit may not begin accumulating the credit toward the taxpayer’s commercial activity tax liability until January 1, 2008, and may not apply that credit against its commercial activity tax liability until the period July 1, 2008 to September 30, 2008, the return for which is due November 9, 2008. According to a letter issued by the department of development on December 29, 2006, the credit referenced in any certificate issued before May 31, 2008 must be claimed against the taxpayer’s corporation franchise tax liability, and the credit referenced in any certificate issued after May 31, 2008 must be claimed against the taxpayer’s commercial activity tax liability beginning with the return due November 9, 2008. Alternatively, recipients that are pass-through entities may elect to pass the credit through to such entity’s owners. Of course, recipients that make that election may not claim any portion of the credit against their commercial activity tax liability.

(b) For commercial activity tax purposes, a taxpayer operating on a fiscal year basis that has a credit for any portion of calendar year 2007, which credit the taxpayer cannot claim against its corporation franchise tax liability, may claim the credit for that short period against the taxpayer’s commercial activity tax liability.

(c) For example, assume that a fiscal year taxpayer operates with an April 30 year-end. The taxpayer enters into an agreement in year 2000 with the director of development for a credit for a period of fifteen years. According to the agreement, the first taxable year for which the taxpayer can claim the credit is the taxable year beginning May 1, 2000 and ending April 30, 2001, which coincides with the taxpayer’s corporation franchise tax report year 2002. When the taxpayer entered into the agreement, the last taxable year for which the taxpayer could have claimed the credit under the corporation franchise tax was the taxable year ending April 30, 2015, which corresponds with corporation franchise tax report year 2016. Because the commercial activity tax is computed and reported on a calendar year basis, the taxpayer is concerned with its credit for the short period May 1, 2007 to December 31, 2007. Assume the taxpayer receives a certificate for that period from the director of development on July 30, 2008. The taxpayer should claim the credit for that short period on its commercial activity tax return due November 9, 2008 to the extent of the taxpayer’s liability for that quarter. Any unused credit is carried forward to the taxpayer’s next quarterly return and applied against the taxpayer’s corresponding commercial activity tax liability. Beginning in calendar year 2009, the taxpayer is required to compute the total amount of available credit on a calendar year basis, regardless of its fiscal year-end. Accordingly, the director of development will issue a certificate for the period January 1, 2008 through December 31, 2008 to the taxpayer, and the taxpayer will claim the credit on its return for the period during which the taxpayer receives the certificate.

(3)(a) In accordance with division (H) of section 122.171 of the Revised Code, a taxpayer claiming a credit under section 122.171 of the Revised Code must submit to the commissioner a copy of the certificate from the director of development along with the taxpayer’s tax return for the tax period in which the taxpayer receives the certificate. For purposes of the commercial activity tax, some taxpayers are required to file tax returns and to remit tax due on a quarterly basis electronically in accordance with section 5751.07 and division (C) of section 5751.05 of the Revised Code and Ohio Adm. Code 5703-29-05. Those taxpayers must send a copy of the certificate to the commissioner’s attention separately from their electronic returns along with completed schedules as referenced in paragraph (A)(3) of this rule. The taxpayers must send all such information, including a copy of the certificate, to the following address: Ohio Department of Taxation, Commercial Activity Tax Division – CAT Credits, P.O. Box 530, Columbus, Ohio 43216-0530. A taxpayer subject to the commercial activity tax that is eligible to claim a credit under section 122.171 of the Revised Code must obtain a certificate from the director of development before the taxpayer may claim any credit. If the taxpayer fails to provide a copy of the certificate with its return or, if filing electronically, a copy to the commissioner with its schedule, the taxpayer must supply a copy of the certificate within sixty days of the commissioner’s request.

(b) For example, a taxpayer accrues a credit under section 122.171 of the Revised Code for the period January 1, 2009 to December 31, 2009. The taxpayer applies for a certificate with the director of development and receives the certificate June 30, 2010. The taxpayer may apply the credit against its commercial activity tax liability for the period April 1, 2010 to June 30, 2010 on its return due August 9, 2010. In the event the taxpayer does not fully utilize its entire credit, the taxpayer may carry forward any unused portion to apply against its future commercial activity tax liability for a period of up to three years. The taxpayer must supply the commissioner with a copy of its certificate at the time it files its initial return. If the taxpayer does not supply a copy of the certificate at that time, the taxpayer must supply a copy of the certificate within sixty days after the commissioner requests such copy.

(C)(1) Pursuant to section 5751.51 of the Revised Code, the nonrefundable credit for qualified research expenses is available to taxpayers to apply against their commercial activity tax liability for purposes of conducting in-house research and contract research to the extent those taxpayers could not have applied the credit against the corporation franchise tax. The term “qualified research expenses” is defined in section 166.21 of the Revised Code.

(2) A taxpayer may not begin accumulating a credit for qualified research expenses until tax year 2008, and may not begin applying that credit against its commercial activity tax liability until the period July 1, 2008 to September 30, 2008. The credit for qualified research expenses is different from the other credits available under the commercial activity tax, in that a taxpayer must compute the credit on an annual basis, regardless of such taxpayer’s commercial activity tax filing frequency. Thus, a taxpayer must claim the credit for qualified research expenses on its annual return due in February of each year. Any portion of the nonrefundable credit that remains unused after the taxpayer applies the credit against its commercial activity tax liability may be carried forward to the subsequent return for no more than seven years. In addition, a taxpayer must compute the credit for qualified research expenses based on expenses the taxpayer incurs during the calendar year (not the taxpayer’s federal taxable year or corporation franchise taxable year).  

(D)(1) Pursuant to section 5751.52 of the Revised Code, the nonrefundable credit for research and development loan payments is available to taxpayers for application against the commercial activity tax liability for purposes of paying allowable costs of eligible research and development projects. The terms “borrower” and “qualified research and development loan payments” are defined in section 166.21 of the Revised Code. A taxpayer may make an application to the director of development for consideration for this credit, and, if approved, the director of development will issue a certificate.

(2) A taxpayer may not begin accumulating a credit for qualified research expenses toward the commercial activity tax liability until tax year 2008, and may not begin applying that credit against its commercial activity tax liability until the period July 1, 2008 to September 30, 2008 on the return due November 9, 2008. Any portion of the nonrefundable credit that remains unused after the taxpayer applies the credit against its commercial activity tax liability may be carried forward to the subsequent period until used in its entirety.

(3) In accordance with division (B) of section 5751.52 and division (D) of section 166.21 of the Revised Code, before a taxpayer may claim a credit under section 166.21 of the Revised Code, the taxpayer must obtain a certificate from the director of development. The taxpayer must submit a copy of that certificate along with the taxpayer’s tax return for the tax period in which the taxpayer receives the certificate. For purposes of the commercial activity tax, taxpayers that remit the tax due on a quarterly basis electronically in accordance with section 5751.07 and division (C) of section 5751.05 of the Revised Code, and Ohio Adm. Code 5703-29-05 must send a copy of the certificate to the commissioner’s attention separately from its electronic return along with a completed schedule as referenced in paragraph (A)(3) of this rule. The taxpayer must send all such information, including a copy of the certificate, to the following address: Ohio Department of Taxation, Commercial Activity Tax Division – CAT Credits, P.O. Box 530, Columbus, Ohio 43216-0530. If the taxpayer fails to provide the certificate with the return or, if filing electronically, a copy to the commissioner, the taxpayer must supply a copy of the certificate within sixty days of the commissioner’s request.

(E)(1) Pursuant to section 5751.53 of the Revised Code, the credit for unused franchise tax net operating loss deductions is available to qualifying taxpayers for application against its commercial activity tax liability to the extent provided by that section and Ohio Adm. Code 5703-29-11. In order to be eligible for a credit for unused net operating loss deductions, a qualifying taxpayer must have filed a report with the commissioner by June 30, 2006 that set forth the amortizable amount available. The term “qualifying taxpayer” is defined in division (A)(4) of section 5751.53 of the Revised Code.

(2) In accordance with divisions (B) and (C) of section 5751.53 of the Revised Code, a qualifying taxpayer may not begin claiming the credit for unused franchise tax net operating losses until calendar year 2010.

  • In accordance with division (B) of section 5751.53 of the Revised Code, the credit phases-in by increments of ten per cent over the first nine years of the credit until calendar year 2019 when a taxpayer may begin claiming one hundred per cent of any remaining, previously unclaimed amortizable amount as a nonrefundable credit against its commercial activity tax liability. A taxpayer may continue to claim one hundred per cent of the remaining and outstanding amortizable amount as a nonrefundable credit from 2019 through 2029. In no event may the taxpayer’s cumulative credit exceed one hundred per cent of its amortizable amount.
  • In accordance with division (C)(1) of section 5751.53 of the Revised Code, the taxpayer may claim a refundable credit for its remaining and outstanding amortizable amount in calendar year 2030. In no event may the taxpayer claim a refundable credit for any portion of the amortizable amount the taxpayer previously claimed as a nonrefundable credit. In addition, a taxpayer may not claim a refundable credit if the claimant was not subject to the commercial activity tax during any portion of calendar year 2030.  

(F)(1) Pursuant to division (A) of section 5751.50 of the Revised Code, the refundable jobs creation tax credit is available to taxpayers and is granted by the tax credit authority under section 122.17 of the Revised Code. A taxpayer that proposes a project to create new jobs in the state of Ohio may apply to the tax credit authority to enter into an agreement in conjunction with division (C) of that section for a tax credit.

(2) A taxpayer claiming a refundable jobs creation tax credit may not begin accumulating the credit until January 1, 2008, and may not apply that credit against its commercial activity tax liability until the tax period beginning July 1, 2008. According to a letter issued by the department of development on December 29, 2006, the credit referenced in any certificate issued on or before May 31, 2008 must be claimed against the taxpayer’s corporation franchise tax liability and the credit referenced in any certificate issued after May 31, 2008 must be claimed against the taxpayer’s commercial activity tax liability.  

(3)(a) In accordance with division (H) of section 122.17 of the Revised Code, a taxpayer claiming a credit under section 122.17 of the Revised Code must submit to the commissioner a copy of the certificate from the director of development. In addition, to claim the refundable credit in the form of a refund, a taxpayer shall submit with the certificate from the director of development a completed schedule as referenced in paragraph (A)(3) of this rule. The taxpayer must send all such information, including a copy of the certificate, to the following address: Ohio Department of Taxation, Commercial Activity Tax Division – CAT Credits, P.O. Box 530, Columbus, Ohio 43216-0530. A commercial activity tax taxpayer that is eligible to claim a credit under section 122.17 of the Revised Code must obtain a certificate from the director of development before the taxpayer may claim any credit. If the taxpayer fails to supply a copy of the certificate from the director of development with the report for the applicable calendar year, the taxpayer must supply a copy of the certificate within sixty days after the commissioner requests such copy. Upon receipt of both the certificate and the schedule, the commissioner will issue a refund to the taxpayer in the amount of the credit, less any outstanding tax liability, by the due date of the return for the period in which the taxpayer submits the information.

(b) For example, assume that a fiscal year taxpayer operates with an April 30 year-end. The taxpayer enters into an agreement in year 2000 with the director of development for a credit for a period of fifteen years. According to the agreement, the first taxable year for which the taxpayer can claim the credit is the taxable year beginning May 1, 2000 and ending April 30, 2001, which coincides with the taxpayer’s corporation franchise tax report year 2002. When the taxpayer entered into the agreement, the last taxable year for which the taxpayer could have claimed the credit under the corporation franchise tax was the taxable year ending April 30, 2015, which corresponds with corporation franchise tax report year 2016. For taxpayers that are subject to the franchise tax phase-out and the commercial activity tax phase-in, the 2008 franchise tax report is the last report for claiming the job creation tax credit against the franchise tax. Assuming that the director of development issues the taxpayer’s credit certificate (based on the taxpayer’s withholding during the period May 1, 2006 to April 30, 2007) on or before May 31, 2008, the taxpayer is to claim the credit shown on that certificate on its 2008 franchise tax report. Because the commercial activity tax is computed and reported on a calendar year basis, the taxpayer is concerned with its credit for the short period May 1, 2007 to December 31, 2007. Assume the taxpayer receives a certificate for that period from the director of development on July 30, 2008. The taxpayer should supply a copy of the certificate along with a completed schedule as referenced in paragraph (A)(3) of this rule to the commissioner. The commissioner will issue a refund in the amount of the credit reflected on the certificate, less any outstanding tax liability, by November 9, 2008 (the due date of the return for the period July 1, 2008 through September 30, 2008). Beginning in calendar year 2009, the taxpayer is required to compute the total amount of available credit on a calendar year basis, regardless of its fiscal year-end.