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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.

How 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.

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Tax 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 table.

Can 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 instructions for Form 3800, General Business Credit.


-- Posted Sept. 2, 1999

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See Also
Related story: Qualifying for the general business credit


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