When it comes to managing business taxes, tax credits offer some of the most powerful ways to reduce what you owe. Unlike deductions, which lower taxable income, tax credits directly reduce tax liability—dollar for dollar. However, businesses can’t always claim unlimited tax credits. The total value of credits available to a business may be restricted by the general business credit (GBC) under Internal Revenue Code Section 38.
Understanding the GBC is crucial for businesses that want to maximize their tax savings while remaining compliant. A key step in this process is working with tax preparation services that can help identify which credits apply to your business and ensure you’re taking full advantage of the tax-saving opportunities available.
What’s Included in the General Business Credit?
The general business credit (GBC) isn’t a single tax credit. Instead, it’s a combination of more than 30 individual tax credits designed to encourage various business activities. Some of the most common credits included in the GBC are:
- Investment credit
- Research credit
- Work Opportunity Tax Credit
- Disabled access credit
- Employer-provided child care facilities and services credit
- Small employer health insurance credit
- Credit for small employer pension plan startup costs
- Employer credit for paid family and medical leave
- Credit for employer Social Security and Medicare taxes paid on certain employee tips
- New energy-efficient home credit
- Renewable electricity production credit
- Low-income housing credit
- Orphan drug credit
- A portion of credits for alternative motor vehicles and alternative fuel vehicle refueling property
Businesses involved in research and development, hiring from certain targeted groups, or investing in renewable energy projects may find significant tax savings opportunities through these credits. However, calculating the total GBC amount and applying it correctly requires expertise in tax law—making professional tax preparation services invaluable.
How the General Business Credit Works
Unlike other tax credits, the GBC is not a standalone credit. Instead, it serves as an umbrella category for multiple business-related credits, each with its own qualification rules and reporting requirements.
If a business claims multiple credits under the GBC, it must also file Form 3800, which consolidates these credits and determines the overall credit limit for the year. The IRS limits the total amount of credits a business can use in a given year based on the following formula:
- A business’s net income tax, minus the greater of:
- The tentative alternative minimum tax (AMT) for the year, or
- 25% of the amount by which the taxpayer’s net regular tax liability exceeds $25,000
For C corporations, the Tax Cuts and Jobs Act (TCJA) eliminated corporate AMT, so this limitation is usually not a concern. However, for individual taxpayers—such as sole proprietors, partners, and S corporation shareholders—AMT rules may restrict how much of the GBC can be used in a given year.
This complexity is why businesses often turn to tax preparation services to calculate their GBC eligibility and avoid costly errors.
What Happens to Unused Tax Credits?
One of the benefits of the GBC is that unused tax credits don’t necessarily go to waste. If your business can’t use all of its credits in a given year due to IRS limits, the excess credit can be:
- Carried back one year, and then
- Carried forward for up to 20 years
The IRS applies a first-in, first-out (FIFO) approach when utilizing carryforwards, ensuring that the oldest credits are used first. However, businesses with significant unused credits need to be aware that credits that remain unused after 20 years will expire.
To avoid losing valuable tax credits, working with expert tax preparation services is critical. A tax professional can develop a long-term tax strategy to maximize the use of these credits before they expire.
Deduction for Expired or Unused Credits
If a business ultimately cannot use its tax credits, there’s still a potential tax-saving opportunity. Under Section 196, expired or unusable credits may be deducted as an expense in the following tax year.
This deduction is particularly relevant for C corporations considering a sale. If a corporation is acquired, and the transaction is treated as a deemed asset sale for tax purposes, the seller may face significant taxable gains. However, if the seller has unused GBCs, they may be able to claim a Section 196 deduction to offset those gains.
Without the right planning, businesses could lose out on this valuable tax break. Engaging with professional tax preparation services can ensure that your business takes full advantage of available tax deductions.
How Professional Tax Preparation Services Can Help
Navigating the GBC requires more than just basic tax knowledge. With multiple credits, complex qualification requirements, and IRS limitations, making the most of your eligible tax credits requires professional expertise.
Here’s how tax preparation services can help:
- Identifying Eligible Credits – Not all businesses realize which tax credits they qualify for. A tax professional can analyze your business operations and pinpoint applicable credits.
- Ensuring Compliance – Each tax credit has unique reporting requirements. Filing incorrectly can lead to penalties or lost credits.
- Optimizing Credit Usage – A tax advisor can help you strategically apply credits to maximize savings while staying within IRS limits.
- Managing Carryforwards – If your business can’t use all its credits in one year, a professional can track and apply carryforwards effectively.
- Reducing Tax Liability – Whether through Section 196 deductions or credit utilization strategies, tax professionals help businesses minimize their overall tax burden.
For businesses looking to optimize their tax strategy, working with experienced tax preparation services is essential. The right tax planning can unlock thousands—if not millions—in savings, helping businesses reinvest in growth and sustainability.
Maximize Your Tax Savings Today
Understanding and applying tax credits effectively is a crucial part of minimizing your business’s tax liability. However, with complex eligibility rules and limitations, navigating the general business credit requires expertise.
Burton McCumber & Longoria offers comprehensive tax preparation services to help businesses maximize their tax credits while staying fully compliant with IRS regulations. Whether you’re looking to claim new credits, manage carryforwards, or optimize deductions, our team of experienced professionals is here to help.
Contact Burton McCumber & Longoria today to ensure you’re getting the tax savings your business deserves!
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