FAQs on the General Business Credit

The general business credit (GBC) may help certain small businesses cut their federal income tax obligations significantly. This is an “umbrella” credit that encompasses various business-related credits, which are far more valuable than tax deductions. While deductions reduce only your taxable income, tax credits directly offset your tax liability on a dollar-for-dollar basis.

Understanding the GBC is essential for effective tax planning. Here are the answers to some common questions about the credit and how it works.

Which Businesses Are Eligible?

The GBC is available to small businesses whose stock isn’t publicly traded, partnerships and sole proprietorships. To qualify, a company’s average annual gross receipts for the preceding three-year period may not exceed $50 million. Gross receipts for any tax years must be reduced by returns and allowances made during that year.

If your business didn’t exist for the entire three-year period, base your average annual gross receipts on the period it did exist. If your business had a tax year of fewer than 12 months, your gross receipts must be annualized. This is done by multiplying the gross receipts for the short period by 12 and dividing the result by the number of months in the short period.

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.

What’s Included in the Credit?

The GBC includes:

• The Investment Credit,
• The Work Opportunity Credit,
• The Alcohol and Cellulosic Biofuel Fuels Credit,
• The Credit for Increasing Research Activities,
• The Low-Income Housing Credit,
• The Disabled Access Credit,
• The Qualified Plug-in Electric and Electric Vehicle Credit,
• The Renewable Electricity, Refined Coal, and Indian Coal Production Credit,
• The Empowerment Zone Employment Credit,
• The New Markets Credit,
• The Credit for Small Employer Pension Plan Startup Costs,
• The Credit for Employer-Provided Childcare Facilities and Services,
• The Alternative Motor Vehicle Credit,
• The Alternative Fuel Vehicle Refueling Property Credit,
• The Carbon Dioxide Sequestration Credit,
• The Qualified Plug-In Electric Drive Motor Vehicle Credit,
• The Credit for Small Employer Health Insurance Premiums, and
• The Employer Credit for Paid Family and Medical Leave.

The IRS prescribes a specific order in which these credits must be used.

Important: Some of the included credits have expiration dates. Check with your tax advisor to confirm that a credit is available for the year in which it’s claimed.

How Much Is the Credit?

You must use your GBC on a “first-in, first-out basis,” by offsetting the earliest-earned credits first. Thus, your credit for a tax year consists of your carryforward of business credits from prior years plus the total of your current year business credits. Your credit for the year may later be increased by the carryback of business credits from subsequent years.

The GBC is nonrefundable. That means it can reduce your tax liability only to zero. Generally unused credits can be carried back one year.

Unused credits remaining after a one-year carryback can be carried forward for 20 years. Qualified business credits that remain unused after the last tax year of the 20-year carryforward period can be taken in full as a tax deduction. You’ll generally claim the deduction in the tax year following the last tax year of the carryforward period.

Important: Certain credits are subject to different carryback rules. For example, beginning with the 2023 tax year, energy-related tax credits eligible for elective payments or transfers under Internal Revenue Code Section 6417 can be carried back three years and then forward 20 years. And certain oil and gas production credits can be carried back five tax years.

The IRS limits the amount of the GBC that can be claimed in one year to 25% of the excess (if any) of net income tax over $25,000. Net income tax is the sum of your regular tax liability and the tax imposed by the alternative minimum tax (C corporations are no longer subject to the alternative minimum tax), reduced by certain other credits.

What’s Involved in Claiming the Credit?

Claiming the GBC can be a complicated process. Each individual credit must be calculated first on separate forms, then carried to IRS Form 3800 (General Business Credit).

In addition, Form 3800 is being revised to incorporate changes made by the Inflation Reduction Act and the Creating Helpful Incentives to Produce Semiconductors Act (better known as the CHIPS Act). The changes are likely to make the process more cumbersome and potentially confusing, though possibly more lucrative.

Worth the Time

Don’t let the complexity of the process cause you to miss out on the GBC. We can help your company maximize the amount of the credit you’re eligible for.

Copyright 2024

This article appeared in Walz Group’s April 1, 2024 issue of The Bottom Line e-newsletter, produced by TopLine Content Marketing. This content is for informational purposes only.