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