If you’re new to entrepreneurship, learning how to do your taxes as a small business owner is a necessary step for financial success. There’s new concepts to learn, and your past experience filing taxes as a traditional employee isn’t directly transferable. One thing you’ll definitely want to make sure you understand before tax season is the general business credit.
While it has the potential to save you a good deal of money, this tax credit’s organization is somewhat unusual. Let’s take a closer look at the general business credit so you can take on your taxes with confidence.
What is the general business credit?
Most of the credits and deductions small business owners must consider their eligibility for are individual and not grouped. The general business credit causes confusion because it’s actually an umbrella term under which many other tax credits fall. Understanding this group is essential for optimizing savings on your taxes. Since these are credits and not deductions, you’ll see any amount you’re eligible to claim come right off your tax bill—so it’s imperative for you to understand how to claim the credit correctly.
Over 25 individual credits are included under this umbrella term, and individuals working in sole proprietorships, partnerships, S corporations, estates, trusts, or non-publicly traded corporations may be eligible to receive them. The credits include, but are not limited to:
- COVID-19-related tax credits
- Small business health care tax credit, which credits employers for offering employees health care coverage
- Credit for increasing research activities, an incentive for small business owners in certain fields to dedicate more funds to research and experimentation
- Credits for investing in or utilizing renewable energy, alternative energy, or non-conventional fuel types
- Work opportunity credit, which incentivizes hiring employees from specific groups that face particularly high unemployment rates
- Employer differential wage credit, which provides an incentive to continue paying wages to an employee on active duty in the military for more than 30 days
- Childcare facilities and services credit, which gives small business owners an incentive to provide employees with childcare for their employees
- Credit for alternative motor vehicles, which is available to business owners who make use of certain types of alternative vehicles within their business operation
How to file for the general business credit
Because of the aggregate nature of this group of credits, the process of filing for them is somewhat more complicated than other individual credits.
First, you’ll need to determine which of these credits apply to your small business. The full list of credits is available on the IRS website, and this page should be reviewed carefully. Fill out the specific forms for each credit you’re claiming to determine the amount you’ll receive based on your business activities.
Once you’ve done this, you’ll complete the general business credit form, form 3800, which is essentially a summary of all the individual credits that you’re eligible for. Pull the individual credit amount from the original forms onto form 3800.
The specific rules for which forms you need to submit to claim these tax credits change based on which credits you’re eligible for and whether your business is classified as a partnership, S corporation, estate, trust, cooperative, or something else. To be sure you’re submitting all the necessary documentation, carefully review and adhere to the IRS instructions page.
Carryback and carryforward rules
The general business credit can’t be used to zero out a business’s tax liability in a given year, and there are restrictions as to exactly how much credit you’re able to receive through this credit aggregate. The limit is determined by taking your net income for the year and subtracting either your tentative minimum tax or 25% of your net regular tax liability over $25,000, whichever number is larger. However, there are ways to claim whatever credit you’re eligible for beyond your credit limit through either a carryback or a carryforward.
Once you’ve claimed all that you can in a given year, you can carry the remaining credit back to the year preceding the credit year if you did not meet your credit limit in that year. If you did, you are instead able to carry the credit forward to the next year, or up to the next 20 years, depending on your tax circumstances.
While this part can get tricky, the main takeaway is this: it’s important that you receive the full amount you’re eligible to receive through the general business credit. In the event that you are not able to claim all you’ve earned in a year, work with an accountant to determine the best way for you to carryback or carryforward the remainder into other years when you did not meet the limit.
Discuss the general business credit with your accountant
The only real difference you need to know about the general business credit versus a different tax credit is that it’s essentially intended to provide a summary of all business-related credits you’re eligible for. Remember that you will likely need to provide the original form for each individual credit you claim as well, but that the specific requirements for you will vary based on your business structure and any IRS-identified exceptions that may apply to you.
To ensure you’re getting the full credit you’ve earned, and to help navigate the exact way you obtain it in the event that a carryback or carryforward is necessary, you may want to seek professional help from an accountant. Though the IRS provides thorough instructions, it’s not always easy to determine where your small business falls on a given point, and expert aid may be needed to ensure you’re correctly processing your general business credit.