Business owners have so many balls up in the air that the tax process is infinitely more complex and stressful for them than it is for most other people (unless, like Taylor Swift, you're the sort of individual who's practically a corporation). Fortunately, the government recognizes the challenges that entrepreneurs face every day, and have responded in kind over the years with a variety of lucrative credits. These businesses provide much-appreciated jobs, products and services, so it's only fair that they enjoy a bit of monetary relief, right?
Dollar for dollar tax credits have become increasingly popular over the years, and are typically preferable to deductions, which simply lower taxable income. The benefits of accurately claiming general business credits are significant. "Credits reduce the amount of business taxes owed to the federal or state government," says Marilyn M. Niwao, president of the National Society of Accountants. "For a business, less tax paid means more money will be available to the business owner to reinvest in and grow the business."
General business credits were created by the U.S. Congress to boost the economy and address specific social concerns, like helping disadvantaged communities. These nonrefundable cash cows are available to businesses and people who meet all of the necessary requirements [source: 360 Degrees of Financial Literacy]. Keep reading to learn more about the credits out there and how to go about claiming them to the best of your business ability!
Types of General Business Credits
There are typically around 30 credits available to business owners, but unless your company imports distilled spirits, maintains railroad tracks and trains mine rescue teams all at the same time, it's unlikely that you'll ever be able to claim 'em all in one fell swoop. Although some of the credits are seemingly random, they can actually mean big bucks for businesses in specific industries. Of course, many standard credits were also created to incentivize common workplace/business concerns, like environmental responsibility and good employer practices. Check out this sampling, and see the IRS site for the full, constantly evolving list:
Employee-based credits: Small business owners who incur costs associated with a variety of employee-related needs are eligible for credits. Disability access measures, pension plan startup costs, employee child care and health insurance coverage expenses are common costs that can be leavened by dollar for dollar credits. Employers who hold paid positions for active duty military for more than 30 days are also eligible for a credit to offset differential wage payment costs.
Alternative fuel: The government is making it worth the while of Big Business to switch over to more Earth-friendly fuel options. Among them are the biodiesel and renewable diesel fuels credit, the low sulfur diesel fuel production credit and the alternative motor vehicle credit. On a related note, businesses that purchase and use qualified electric plug-in vehicles, rather than standard gas guzzlers can also enjoy a nice cash windfall.
Energy-efficiency: Manufacturers of energy-efficient homes and appliances are able to receive credits for their efforts, which consumers also enjoy, to a lesser extent.
Low-income assistance: Businesses that operate low-income housing are also eligible for a credit, as are employers who hire workers of certain groups that typically have higher unemployment rates (such as ex-felons), via the work opportunity credit.
Research and development: Of particular note to those in the energy field, the credit for increasing research activities was established to encourage businesses to engage in continual development for the good of industry as a whole.
How to Claim the Credits
You know the old saying "knowledge is power?" Well, in this case, knowledge is also money. Tons of credits go unclaimed every year by private citizens and businesses because they simply don't know about them. It's time to rectify that.
In general, each individual credit has its own form that must be filled out in order to claim it. If you're qualified to receive more than one credit, Form 3800 (General Business Credit) should also be completed to summarize the full set of opportunities [source: 360 Degrees of Financial Literacy]. All of the pertinent documentation is then submitted along with the business' income tax return.
Business tax credits have to be claimed for the year that the corresponding expenditures occurred. However, in some years, a business might have a lower tax liability than the amount of credits it managed to rack up. When that happens, the credits can be carried forward for up to 20 years, or carried back up to one year.
"Suppose the small business health care credits amounted to $10,000, but the business owed only $7,000 in taxes that year because of its net taxable income," explains Niwao. "The $10,000 credit could be used to lower the taxes to zero, but typically the excess $3,000 would be nonrefundable. If that is the case, the $3,000 can be used in the prior year to offset prior year taxes paid." This adjustment is accomplished by filing an amended tax return. "If there were insufficient taxes paid in the prior year, the excess $3,000 could be carried forward to subsequent years to offset future years' tax liabilities."
Keep in mind, the general business credit total you claim can't exceed a specific formulaic calculation. To discover that amount, add your alternative minimum tax (AMT) to the net regular tax. Then, subtract either 25 percent of the regular tax liability that is greater than $25,000 or the business' tentative minimum tax for the particular tax year in question. You must use whichever amount is the larger of the two for this particular math problem [source: H&R Block].
Tips for Claiming the Credits
As with most unfamiliar actions, it pays to familiarize yourself with the associated lingo. For instance, the IRS asks you to list your passive activity credits on Form 3800. I'd categorize an evening on the couch watching Real Housewives of Wherever as a "passive activity," but the IRS disagrees. In tax terms, a passive activity (for which credits are available) is a business function or trade in which a person doesn't participate on a "regular, continuous and substantial basis" [source: IRS]. Renting out real estate is probably the best example. So brush up on your tax terminology for the best possible results!
Some credits require more elbow grease than others, which can be a turnoff to business owners who are already strapped for time. Niwao offers up the small business health care credit as a prime example. The credit was designed to benefit businesses that meet a few important criteria. Specifically, a hopeful business must employ less than 25 people, pay less than $50,000 per year in average wages and cover a minimum of half of employee health insurance premiums [source: IRS]. The trouble with the credit is that it requires specific employee-related information that probably wouldn't need to be collected otherwise, such as detailed premium and wage information.
"Many small businesses forego the credit because of the complexity and time to gather the required information," explains Niwao. Making the effort is probably worth it in the long run, however. "Starting in tax year 2014, the maximum tax credit amount increases to 50 percent of qualifying premium contributions, which can be quite substantial."
It's tempting to focus on the federal perspective, but it's also worth a look-see into the general business credits your particular state has to offer. Many are similar in nature to federal options, but others address local concerns and economic expansion opportunities, as well. For example, New York state offers a credit for businesses that provide disability-friendly vehicles (taxicabs and livery), as well as a variety of commercial and film production credits to boost the economy [source: New York Department of Taxation and Finance].
Author's Note: How General Business Credits Work
About a zillion factors go into running and making a business successful. Entrepreneurship is often cutthroat and stressful, so it's refreshing to see that the government is taking steps to reward responsible, economy-stimulating behaviors.
- 360 Degrees of Financial Literacy. "General business tax credits." American Institute of CPAs. 2014 (Dec. 4, 2014) http://www.360financialliteracy.org/Topics/Taxes/Tax-Deductions-and-Credits/General-business-tax-credits
- H&R Block. "General Business Credit." 2014 (Dec. 4, 2014) https://www.hrblock.com/free-tax-tips-calculators/tax-help-articles/Credits/General-Business-Credit.html?action=ga&aid=27147&out=vm
- IRS. "General Business Credits." 2014 (Dec. 4, 2014) http://www.irs.gov/publications/p334/ch04.html
- IRS. "Small Business Health Care Tax Credit for Small Employers." 2014 (Dec. 4, 2014) http://www.irs.gov/uac/Small-Business-Health-Care-Tax-Credit-for-Small-Employers
- IRS. "Topic 425: Passive Activities – Losses and Credits." 2014 (Dec. 9, 2014) http://www.irs.gov/taxtopics/tc425.html
- National Park Service. "Tax Incentives for Preserving Historic Properties." 2014 (Dec. 4, 2014) http://www.nps.gov/tps/tax-incentives.htm
- New York Department of Taxation and Finance. "General business corporation (Article 9-A) tax credits." http://www.tax.ny.gov/bus/ct/article9a_tax_credits.htm
- Niwao, Marilyn M. President, National Society of Accountants. Personal interview via e-mail. Dec. 2, 2014.
- U.S. Small Business Administration. "Federal Tax Credits for Energy Efficiency." 2014 (Dec. 4, 2014) https://www.sba.gov/content/federal-tax-credits-energy-efficiency