Claiming the general business credit
Sept. 2, 1999 -- Believe it or not, there is
something better for a business owner during the tax season than
finding another deduction -- finding a tax credit.
A tax credit will reduce taxes
more than a same-sized tax deduction. This tip explains how credits
reduce taxes owed by businesses. Business owners also will find
out which activities qualify for the general business credit.
The credit is granted by Congress to encourage
businesses to engage in activities legislators believe are socially
worthwhile. They exist for taking people from welfare to work, for
making alternative fuels and to reimburse businesses that run up
expenses making their buildings accessible to the disabled.
do tax credits work?
What does it mean to be eligible for a tax credit instead of
a tax deduction? It helps to understand that in the case of deductions,
the amount of money saved changes as the business owner's income
tax bracket changes. Changing brackets doesn't have the same effect
when it comes to tax credits.
Suppose you are in the 15 percent income tax
bracket. A $1,000 tax deduction will save you 15 percent of $1,000,
or $150. If you are in the 28 percent tax bracket, this same deduction
will mean a $280 cut in taxes. The decrease in tax liability is
greater, however, with a tax credit. A $1,000 tax credit will save
you $1,000 -- period -- regardless of your tax bracket.
credits for business
The general business credit is a two-part credit for business
owners. You first add up any business credits you have qualified
for in the current year. You "carry over" business credits
from previous years.
There are several activities that qualify for
the general business credit. These are listed below, along with
the form used to figure each credit. Business owners should pay
close attention to two other details. First, three of the activities
described have deadlines that occur in 1999. Also, situations such
as unused tax credits require the completion of Form
3800 in addition to the forms indicated in the accompanying
you avoid completing Form 3800?
If you meet all the following conditions, you have to use only
the form specified with the credits mentioned above:
- You have only one current year business credit.
- You have no carry back or carry over.
- The credit (other than the low-income housing
credit) doesn't result from a passive activity. See Form
8582-CR for information about passive activity credits.
If you don't meet all these conditions, you
must complete Form 3800, General Business Credit. Taxpayers should
keep in mind that the IRS has changed the years to which taxpayers
can carry back and carry forward unused credits.
How does this affect using an unused credit
to reduce tax liability? In the case of carrying back a credit,
you must carry the unused credit back to the first tax year before
the year the credit arises. Carry any unused credit forward to each
of the 20 years after the year the credit arises until you have
taken the full amount of the credit. This change applies to credits
arising in tax years beginning after 1997. For more information
about the carry back and carry forward of unused credits, see the
for Form 3800, General Business Credit.
-- Posted Sept. 2, 1999