A Powerful Tax Strategy to Reduce Your Business’s Tax Burden
The General Business Credit (GBC) represents the aggregate value of individual tax credits a business claims during a tax year. This comprehensive tax benefit encompasses carryforward credits from previous years, as well as the current year’s total business credits. Importantly, as a tax credit rather than a deduction, the amount directly offsets your tax liability.
If your business qualifies for multiple tax credits, you’ll need to summarize these on IRS Form 3800, General Business Credit, and include it with the individual credit forms in your tax return.
Key Takeaways
- The GBC consolidates the total value of all tax credits a business claims over a year.
- When claiming multiple business credits, reporting on IRS Form 3800 is mandatory.
- Numerous business tax credits qualify for the GBC, including those related to investments, low-income housing, and small employer healthcare premiums.
Understanding the General Business Credit
Unlike other credits, the General Business Tax Credit encompasses specific tax incentives bundled together to encourage various business practices. These activities include research, oil recovery, reforestation, and setting up pension plans.
To maximize your GBC, each individual tax credit must first be reported on its designated IRS form. Then, these are summarized on Form 3800 to determine the total allowable credit for your business. Some common credits incorporated into GBC include:
- Investment Credit (Form 3468): Encompasses rehabilitation, various energy projects, and advanced coal and gasification projects.
- Work Opportunity Credit (Form 5884-C): Benefits employers hiring individuals from specific groups who may face significant barriers to employment.
- Small Employer Health Insurance Premiums Credit (Form 8941): Assists small businesses in covering employee health insurance premiums.
- Employer Credit for Paid Family and Medical Leave (Form 8994): For employers providing paid family and medical leave to employees.
- Low-Income Housing Credit (Form 8586): Incentivizes businesses investing in low-income housing projects.
- Disabled Access Credit (Form 8826): Available for businesses enhancing accessibility for disabled employees/internal activities.
- Energy Efficient Home Credit (Form 9808): Encourages businesses to sell or lease homes meeting energy efficiency goals, subject to legislative extensions.
- Credit for Employer-Provided Child Care (Form 8882): Offers financial relief for businesses providing childcare facilities and services.
- Small Employer Pension Plan Startup Costs Credit (Form 8881): Assists small businesses initiating employee pension plans.
- Credit for Employer Social Security and Medicare Taxes on Tips (Form 8846): For businesses in the food and beverage industry managing employee tips.
Be aware that some tax credits may have expiration dates. Confirm the availability of each credit for the respective tax year.
General Business Credit Limitations
When applying GBC, note potential limitations. Follow these steps:
- Add your net income tax to alternative minimum tax.
- Subtract the greater of your tentative minimum tax or 25% of the portion of regular tax liability exceeding $25,000.
If either spouse has no current or unused credit, the other may utilize the entire $25,000 toward the yearly credit computation.
Filing the General Business Credit
To claim GBC:
- Complete individual tax forms for each qualifying credit.
- Calculate and transfer the total to Form 3800, General Business Credit.
Eligible Tax Credits within the General Business Credit
Form 3800 covers dozens of tax credits, including those for investments, work opportunities, low-income housing, pension plans, childcare services, and health insurance premiums. To explore a comprehensive list, refer to the latest IRS guidelines.
Eligibility for the General Business Credit
Eligible entities, as defined by the IRS, include:
- Non-publicly traded corporations.
- Partnerships.
- Sole proprietorships.
Qualification requires the entity’s average annual gross receipts not to exceed $50 million during the prior three tax years. For newer businesses, calculate based on the operational period.
The General Business Credit serves as an instrumental strategy for businesses aiming to minimize tax burdens and reinvest saved funds into operations and growth initiatives.
Related Terms: refund policies, tax deductions, small business strategies, tax incentives, financial year-end planning.
References
- Internal Revenue Service. “Business Tax Credits”.
- Internal Revenue Service. “Publication 334 (2021), Tax Guide for Small Business”.
- Internal Revenue Service. “About Form 3468, Investment Credit”.
- Internal Revenue Service. “Instructions for Form 8908”.
- Internal Revenue Service. “Instructions for Form 3800 (2021)”.
- Internal Revenue Code. “26 USC 38: General Business Credit(c)(1)”, Pages 146-147.
- Internal Revenue Code. “26 USC 38: General Business Credit(6)(a),” Page 147.
