A common question is what happens to an R&D tax credit that a taxpayer cannot fully use in the current year. This page explains the carryback and carryforward rules. It is educational and is not individualized tax advice. For the economic effect, see our page on whether the R&D credit reduces taxes owed.
The General Business Credit Framework
The research credit under Section 41 is part of the general business credit system. Under Section 38, the general business credit is limited to the taxpayer's tax liability for the year. This means that the total general business credits a taxpayer can use in a given year — including the research credit and any other general business credits — are capped at the taxpayer's tax liability.
If the taxpayer's general business credits exceed the Section 38 limitation for the year, the excess is an "unused credit" that may be carried to other years under Section 39.
The Current Carryback Rule
Under Section 39(a)(1), an unused general business credit is first carried back to the taxable year preceding the unused credit year. This is a one-year carryback. The unused credit is applied to the preceding year's tax liability, subject to the Section 38 limitation for that year.
The Current Carryforward Rule
Under Section 39(a)(1), after the one-year carryback, any remaining unused credit is carried forward to each of the 20 taxable years following the unused credit year. This is a 20-year carryforward. The credit is applied to tax liability in each carryforward year, subject to the Section 38 limitation for each year.
Why "Calculated Credit" and "Current-Year Usable Credit" May Differ
A key distinction is between the calculated (tentative) credit and the current-year usable credit:
- Calculated credit. The amount computed under the regular or ASC method on Form 6765. This is the gross credit before limitations.
- Current-year usable credit. The amount the taxpayer can actually use in the current year, after the Section 38 limitation and any other applicable rules.
If the calculated credit exceeds the taxpayer's tax liability for the year, the excess is carried — first back one year, then forward up to 20 years. The taxpayer does not lose the credit, but may not be able to use it immediately. For more on the distinction, see our page on whether the R&D credit reduces taxes owed.
What This Does Not Mean
This page does not imply that:
- all unused credits can always be fully recovered later (they are subject to the 20-year carryforward limit and the Section 38 limitation in each year);
- a calculated credit always results in an immediate tax reduction (it may be carried if the limitation is exceeded);
- the carry rules guarantee a specific dollar benefit (the benefit depends on future tax liability).
A Hypothetical Illustration
The following is a hypothetical illustration for educational purposes only. It does not represent any actual taxpayer and does not state a filing recommendation.
Suppose a taxpayer has a calculated research credit of $50,000 for the current year and a tax liability that limits the current-year general business credit to $30,000. The unused $20,000 is carried back one year. If the preceding year's tax liability can absorb $10,000 of the carryback, the remaining $10,000 is carried forward up to 20 years, to be used in future years subject to the Section 38 limitation in each year.
This illustration explains the concept, not a specific outcome.
Record Retention Importance
Because unused credits may be carried forward up to 20 years, record retention is important. The taxpayer should retain records supporting the original credit computation, the carryback, and the carryforward, for as long as the credit may be material. The Instructions for Form 6765 include a worksheet for figuring the general business credit carryforward. For more on recordkeeping, see our page on R&D tax credit documentation.
Relationship to Form 3800
The general business credit — including the research credit — is reported on Form 3800, General Business Credit. Form 3800 is where the Section 38 limitation is applied and where carrybacks and carryforwards are tracked. The research credit computed on Form 6765 flows into Form 3800. For more on the general business credit framework, see our page on whether the R&D credit reduces taxes owed.
Pass-Through Considerations
For pass-through entities, the credit passes through to owners, and the carryback and carryforward rules apply at the owner level. Each owner's ability to use the credit — and to carry unused amounts — depends on that owner's own tax situation. For more, see our page on pass-through entities.
Questions for Your Tax Professional
- How much of my credit can I use in the current year?
- If I have unused credit, how does the carryback and carryforward work for me?
- How long should I retain records supporting my credit and carryforwards?
- How do carryforwards interact with my future tax planning?
- How does this work if my credit passes through from a pass-through entity?
Key Takeaway
The R&D tax credit is part of the general business credit system. Under Section 38, the credit is limited to the taxpayer's tax liability, and under Section 39, unused amounts may be carried back one year and forward 20 years. A calculated credit may differ from the amount usable in the current year, and unused credits do not disappear but are subject to the carry period and the Section 38 limitation in each year. Because the determination depends on specific facts, professional tax review is appropriate. For the economic effect, see our page on whether the R&D credit reduces taxes owed.