Renewable Energy Tax Credits Carryback: Know Your Tax Filing Options

Renewable Energy Tax Credits Carryback: Know Your Tax Filing Options

By: Bryen Alperin, Partner and Managing Director of Renewable Energy & Sustainable Technologies, Foss & Company | Published May 15, 2024

Leveraging Tax Credit Rollbacks Efficiently

For corporations aiming to maximize benefits from renewable energy tax credits, taking advantage of the rollback option for these tax credits can be attractive. Typically, these credits can be rolled back up to three years to offset up to 75% of prior tax liabilities. There are two tax filing options for effectuating the rollback, and each has its advantages and disadvantages. This blog post will lay out the two options and discuss the key differences at a high level.

Option 1: Form 1120-X, Amended U.S. Corporation Income Tax Return

  • Purpose: Form 1120-X is used to correct a previously filed Form 1120 or 1120-A or to make certain elections after the prescribed deadline.
  • Time Frame: Generally, a corporation must file Form 1120-X within three years after the date the original return was filed, or within two years from the time the tax was paid, whichever is later.
  • Authority to Examine: The IRS has the authority to examine Form 1120X prior to the issuance of a refund. This may include conducting an audit if necessary.
  • Processing Time: The processing time can be longer for Form 1120-X  than for Form 1139 because it is not subject to the expedited 90-day review process that applies to Form 1139.
  • Finality: The refund issued  due to an amended return filed using Form 1120-X is not considered tentative, and the IRS’s acceptance of the amended return generally closes the matter unless later found to be erroneous.

Option 2: Form 1139, Corporation Application for Tentative Refund

  • Purpose: Form 1139 is used to apply for a quick refund of taxes due to certain carrybacks, such as net operating losses (NOLs) and tax credits, and to obtain a refund prior to an IRS examination of the return year generating the NOL.
  • Time Frame: A corporation must file Form 1139 within one year of the end of the tax year in which the NOL or tax credit arose.
  • Expedited Refund: The IRS is required to process these applications and issue a refund within 90 days of receipt. However, the refund is considered tentative, and the IRS may later adjust the refund if it finds errors.
  • Limitations: The payment of the claim does not mean the IRS has accepted it as accurate. If the IRS later determines the claimed refund amount is overstated, penalties may be assessed.

Key Differences

  • Ease of Preparation: Filing the Form 1139 allows corporations to avoid the burden of filing a full amended tax return via Form 1120-X.
  • Examination and Audit: Form 1120-X can be examined and audited by the IRS before a refund is issued, while Form 1139 allows for a quicker, tentative refund that may be subject to later adjustment.
  • Processing Time: Form 1139 is designed for expedited processing, typically within 90 days, whereas Form 1120-X may take longer due to the possibility of an IRS examination.
  • Tentative vs. Final Refund: Refunds from Form 1139 are tentative and subject to later revision, while refunds from Form 1120-X are considered final once the IRS processes the amended return.

In summary, if a corporation is seeking a quick refund without amending their prior return and is willing to accept that the refund is tentative and subject to later adjustment, Form 1139 may be the appropriate choice. However, if the corporation prefers a more thorough review by the IRS and a final resolution of its tax liability, then filing an amended return using Form 1120-X would be the better option. It’s important to note that the specific circumstances of the tax situation, including the types of credits being carried back and the tax years involved, may influence the decision of which form to use. For tailored advice, consulting with tax experts like those at Foss & Company can clarify how your specific tax credits and other factors might influence the best approach for your business.

Reach out to Foss & Company today to learn how to maximize benefits from renewable energy tax credits.