The Section 38(c) Limit: How Much Purchased Credit You Can Use Each Year

Every §6418 credit the buyer uses is treated as a general business credit under §38. The annual cap in §38(c) is the number that decides how large a purchase makes sense.

The statutory formula

§38(c)(1) allows the credit only up to the excess of net income tax over the greater of (A) the tentative minimum tax (TMT) or (B) 25% of net regular tax liability above $25,000. "Net income tax" is regular tax plus the §55 tax, reduced by certain nonrefundable credits (subparts A and B).

When TMT is zero, the cap becomes T − 0.25 × (T − $25,000), which is 0.75 × T + $6,250, where T is net regular tax. That is the "75% rule."

Net regular tax (T)	Maximum credit (TMT = 0)
$25,000	$25,000
$100,000	$81,250
$1,000,000	$756,250
$10,000,000	$7,506,250

Shared room

Your own general business credits (for example the research credit) use the same cap, so purchased credits only fill what is left. The Form 3800 instructions walk through the ordering.

Specified credits are computed separately

§38(c)(4) applies §38 and §39 separately to "specified credits," treats TMT as zero for them and reduces their limit by the other general business credits allowed. The list in the Code text we reviewed includes the §48 energy credit and §45 credits for the first four years of a facility's output; it does not list §45X, §45Y or §48E by name. Confirm the current text and how it applies to your credit with your CPA; classification matters here.

Individuals and passive investors

The same §38(c) limit applies to an individual's purchased credit, but only after the §469 passive activity limit has been applied. See §469 and transferable credits.

What to do with unused credit

Unused credit carries back and forward under §39. See carryback and carryforward rules.

Worked example with other credits

A corporation has net regular tax of $2,000,000 and earns $300,000 of research credit. The §38(c) cap with TMT at zero is 0.75 × $2,000,000 + $6,250 = $1,506,250. After the research credit, room for purchased credit is $1,206,250.

If it buys	Used this year	Carried over
$1,000,000	$1,000,000	$0
$1,206,250	$1,206,250	$0
$1,500,000	$1,206,250	$293,750

Other things that change the cap

• Tentative minimum tax. If TMT exceeds 25% of net regular tax above $25,000, the cap is lower.
• Controlled groups. Members of a controlled group share the $25,000 amount and the limit is applied on a group basis.
• Corporate alternative minimum tax and BEAT. Large corporations should model these separately; they can change the benefit of a purchase.

Examples are simplified (TMT assumed zero, no other credits) and are not tax advice. Controlled groups and BEAT taxpayers have additional rules.