R&D Credit Recapture

[Corduroy Frog]

I have a customer who has been reporting R&D Credits every year since 2005. A small portion of these credits
were used in previous years, but in 2011 the corporation (C Corp) became dormant and only collects royalties,
interest income and interest expense. Prior to 2011, the corporation was a manufacturer.

There continue to be carryforward of unused credits for R&D reported each year. No credits have been used
since 2008. Customer has had no tax liability since then, due to large NOLs in 2009 and 2010.

1. Is the credit subject to recapture? After 2005 there were decreasing amounts of R&D expenditures and
beginning in 2009 the expenditures were virtually non-existent.
2. If the credit is subject to recapture, will the corporation be forced to pay even though there is otherwise
no tax liability?

p.s. the predecessor CPA firm prior to my involvement did not recapture any credit, for what that may be worth.

[Roland Slugg]

The Research credit is one of the "general business credits" which funnels to F-3800, so the instructions for F-3800 may be helpful. I believe the carryover is handled on that form.

I don't believe there is a "recapture" of the research credit, per se, but the remaining carryover can be eliminated in either of two ways: (1) The cessation of the activity or sale of the business that gave rise to the credit, or (2) the passage of the 20-year c/o period. In your client's case the activity appears to have been ended, so I believe the remaining carryover goes away. In fact it probably should have been eliminated several years ago.

[Corduroy Frog]

Thanks to Roland

Thanks Mr. Slugg for your usual helpful advice.

However, the credit stopped in 2005, and only minimal amounts have been taken in 2007 and 2008. The rest of it
(in the neighborhood of $500K) remains intact, has never been used.

The oldest credit dates from 2001 and will not expire until 2020. Company has remained chartered with minimal
activity but is still around and has not been sold. Unless there are factors otherwise around to reduce the credit,
I don't see a reduction.

Client was inherited from another preparer. From all I can read, there is no recapture on this particular credit.