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One of the keys to survival for any small-business owner is planning for taxes. It can make the difference between receiving a big, unexpected tax bill—which can put a painful or even fatal dent in a new business—or going on to future success and prosperity.
The US federal government provides for a variety of tax deductions and credits that can reduce the bite taxes take out of your small business. One of the most important things for any small-business owner to understand is the general business credit.
What is the general business credit?
The general business credit (GBC) isn’t actually any one single tax credit. Instead, it’s the combined value of all the individual tax credits the owner(s) of a business claims during the current tax year—which can range from where you choose to do business to whom you decide to hire.
It’s important to note that the GBC is a credit, not a deduction. A deduction reduces the amount of income subject to taxation, while a credit reduces the tax owed, even after deductions are taken. The GBC is a nonrefundable tax credit, meaning it can only go so far to reduce your tax bill. Once your tax bill hits zero, any credit in excess is forfeited, meaning you won’t get a tax refund from Uncle Sam.
Which tax credits does the general business credit include?
The US Internal Revenue Service (IRS) recognizes more than 30 individual general business tax credits. Some of the more popular credits include:
- Investment credit (Form 3468). This is for businesses that own real estate and make upgrades to increase energy efficiency and reduce emissions.
- Work opportunity credit (Form 5884-C). The work opportunity credit is available to businesses that hire individuals from groups that face significant barriers to employment, such as veterans, former prisoners, or those who receive government financial assistance.
- Small employer health insurance premiums credit (Form 8941). This credit is available to small businesses that provide health insurance to employees.
- Employer credit for paid family and medical leave (Form 8994). This credit is available to businesses that offer employees paid leave for family or medical issues.
- Disabled access credit (Form 8826). This credit is for businesses that incur expenses for providing access to employees or customers with disabilities, such as installing a wheelchair ramp.
- Employer-provided child care facilities and services credit (Form 8882). This credit is for businesses that provide on-site child care for employees, or fund in whole or in part employee off-site child care services.
- Employer credit for Social Security and Medicare taxes paid on employee tips (Form 8846). This credit is mainly available to food and beverage service businesses that pay federal taxes on server tips.
- Empowerment zone employment credit (Form 8844). This credit is available to businesses located in an IRS empowerment zone (usually economically distressed communities) that hire employees residing in the same zone.
Limitations of the general business credit
The benefits of the general business credits are not endless. If you manage to reduce your tax liability to zero using the GBC, you won’t receive any tax refund. Likewise, there’s a limit to the total general business credit that can apply to your business in a given tax year, although this varies from one business to another.
The other rules governing how the GBC works are complex, and the help of a tax professional often is needed. According to the US tax code, the GBC for any given taxpayer can’t be more than the excess of net income tax liability, or whichever is greater: (1) the tentative minimum tax for that tax year, or (2) 25% of the taxpayer’s net regular tax liability in excess of $25,000.
- Net income tax is the sum of a business owner’s regular tax liability, plus alternative minimum tax (AMT), minus most allowable credits other than the GBC.
- Net regular tax liability is your regular tax liability minus the sum of most allowable credits other than the GBC.
It’s important to note that GBC-eligible credits are reported and applied in a specific order, which means you should be careful about which credits you use in a given tax year, and which you’ll carry forward. The order of use is:
- Carryforwards from past years. These are credits you didn’t use in previous tax years in which your business was up and running—whether by choice or because you reached the maximum number of credits allowable for your income bracket. Although limits vary depending on the credit in question, some can be carried forward as many as 20 years.
- General business credit earned during the current tax year. These credits are available for use at tax time.
- Carrybacks from future years. These are credits you’ll be eligible to use in future tax years. Restrictions on carrybacks are a bit more limiting than on carryforwards, and most can only be carried back one year, although some may be carried back as many as five.
How to file the general business credit
To claim the GBC, you can fill out tax forms associated with each individual credit you plan to claim (including carryforwards and carrybacks). Next, report the total value of these credits on Form 3800, General Business Credit, which is then filed with the IRS. If approved, you should see the credits applied to your income tax bill for the year in which you filed.
General Business Credit FAQ
How does a business qualify for a general business credit?
Eligible businesses include sole proprietorships, partnerships, S corporations, LLCs, and closely held corporations that aren't publicly traded, as long as average annual gross receipts stay under $50 million over the prior three tax years. Once an eligible entity is formed, credits can be claimed starting in the first year of operation by filing the IRS forms tied to each credit being used.
Can partners or S corporation shareholders claim the general business credit?
Partners and S corporation shareholders generally aren't eligible to claim the general business credit on their individual returns. Partners or S corporation shareholders generally aren't eligible for the credit, however, there's an exception if both the business and the partner or shareholder meet the gross receipts test in the tax year for which the GBC is treated as a current year credit. Outside that exception, the credit typically passes through at the entity level instead.
Is there a deadline for claiming the general business credit?
The deadline to file Form 3800 generally lines up with your business tax return due date: April 15 for corporations, LLCs, and sole proprietorships, and March 15 for partnerships and S corporations. Individual credits within the GBC can carry their own filing requirements, so it's worth checking each form's instructions before submitting.
Can a general business tax credit be carried forward or carried back?
Yes, unused general business credit amounts can carry back one year or carry forward up to 20 years, depending on the specific credit involved. Because credits apply in a set order — carryforwards first, then current-year credits, then carrybacks — tracking which portion belongs to which tax year matters when working within the annual limit.
How long do you have to be in business to qualify for a general business credit?
How long a business has operated typically doesn't determine eligibility for the general business credit on its own. What matters more is meeting the gross-receipts cap and entity-type rules tied to each component credit, so even a first-year business can claim the credit if it meets those standards.
