Does a tax credit affect my basis?

I'm assuming this was the credit for capital contributions to emerging technology companies (NYTL Sec. 606(r)). The credit provision doesn't require you to reduce your basis in the stock, but it does recapture the credit to the extent you held the stock less than 108 months (9 years) after the close of the tax year in which you acquired the stock. The recapture is proportionate to the time the stock was held. In general, state tax credits are not taxable income for federal income tax purposes. While the basis of property that is eligible for certain federal credits is reduced by the amount of the credit, those reductions are not effective for state income tax purposes. Similarly, tax credits allowed by states may reduce the basis of the property for state income tax purposes, but do not affect the federal basis. I don't know why the credit would have been included in your federal taxable income in the year you purchased the stock, but whether it was or not, I don't believe it has any effect on your basis in the stock for federal purposes. Katie in San Diego

That is correct, a QETC. So you are telling me it reduces the basis for my NYS return, but not for my Federal return; right? The company only lasted 6 years. Do I lose part of the credit? Doesn't seem fair, since I never sold it; but the law isn't always fair. I will have to look up my old tax return, maybe my recollection is wrong. Thanks.

No, it isn't a basis reduction for NYS purposes; it's a partial recapture of the credit. In other words, you'd calculate the Schedule D loss the same as federal, but you'd have an ordinary income addition in the amount of the recaptured credit. However, if you still own the stock, and are just writing it off because it has become worthless, I'm not sure the credit recapture applies. I'd have to look into that a little farther. Katie in San Diego

I looked my old return up, and it didn't call it income. By eliminating my NYS taxes, I lost the deduction. That is essentially the same as calling it taxable, isn't it? Not that I am complaining!

I understand; but suppose I invested $100,000 and got a $20,000 credit. My federal basis is $100,000; but is my state basis $100k or $80k?

yes, I still own the stock. The text on the NY is ambiguous, at least to me! Thanks much

See NY TSB-M-00(2)(I), 9/27/2000

There is no basis adjustment for the credit. Your state basis in the stock is $100,000. If you sold, transferred, or otherwise disposed of the stock more than 48 months (4 years) but not more than 72 months (6 years) after the close of the year when the credit was allowed, you would be required to add to your tax liability for the year of disposition 60% of the credit, or $12,000. If the disposition occurred more than 72 months but not more than 96 months after the close of the year when the credit was allowed, you would be required to add to your tax liability for the year of disposition 40% of the credit, or $8,000. Since you did not sell, transfer or otherwise dispose of your stock, I can find nothing in the law or in the TSB that requires the recapture of any part of the credit. Katie in San Diego

Thanks much

To be on the safe side, I'd suggest you call the NY Department of Revenue and ask whether any recapture will be required. Make sure they understand that you still hold the stock and are writing off the investment only because it has become worthless. Katie in San Diego