General Business Credit
The general business credit is actually composed of several credits available to businesses, each calculated under its own set of rules. The credits are combined so that limits can be applied in reducing tax liability. Each credit must 1st be calculated separately on its own form, then the resulting credit is added to Form 3800, General Business Credit to determine the overall limits. Some credits have a special tax liability limitation applied to the credit so they are not listed on Form 3800. The credits are listed in a particular order on Form 3800, which will determine the overall allowable credit. None of the credits can be used to offset the corporate alternative minimum tax.
The objective of most of the credits is to promote employment or the development or use of alternative fuels or other sources of energy, or to protect the environment. Some of the more common credits include the credit for:
- energy efficient homes and appliances
- disabled access
- credit for the employer portion of the employment taxes on tips received by employees
- small employer pension plan startup costs
- small employer health insurance premiums
- employer-provided childcare facilities and services
- employer differential wage payments
- low-income housing and rehabilitation credits
- alternative motor vehicles
- qualified plug-in electric drive vehicles
- general investment credit, which includes credits for rehabilitation and advanced energy projects
The general business credit is a nonrefundable credit that can only be claimed after all other nonrefundable credits are claimed except for the alternative minimum tax credit. Unused credit must 1st be carried back 1 year, then carried forward for up to 20 years. First-in, first-out (FIFO) is applied to the carryback and carryforward provisions of the general business credit, where the oldest credits are applied 1st, to minimize the chances that the carryforward provision will expire. Therefore:
Current general business credit = credits carried forward from previous years + current business credits + any credits carried back from the next year.
So, of course, the total general business credit claimable for any given year may only be determinable in the following year.
Credit for Wages Paid While an Employee is on Family or Medical Leave
The new Tax Cuts and Jobs Act of 2017 provides a general business credit that employers may claim for wages paid to qualifying employees for family and medical leave, for up to 12 weeks per year. To qualify, employers must have a written policy but provides at least 2 weeks paid family and medical leave annually to all qualifying employees who work full time, or prorated for employees who work part time, equal to at least 50% of wages. The new Consolidated Appropriations Act for 2021 (H.R. 133), signed into law on December 27, 2020, has extended this employer credit for paid family and medical leave from 2020 to 2025.
The credit equals a minimum of 12.5% of wages paid while on leave, and increases 0.25% for each percentage point that the paid wage exceeds 50% of regular wages, up to a maximum of 25%.
The credit cannot be claimed if the business must provide the leave under state or local law. The deduction for this compensation must be reduced by the amount of the credit. More info: Section 45S Employer Credit for Paid Family and Medical Leave FAQs | Internal Revenue Service
General Business Credit Limits
The general business credit is limited by the taxpayer's net income tax reduced by the greater of either the tentative minimum tax or 25% of net regular tax liability that exceeds $25,000 (married taxpayers filing separately, $12,500, but only if both spouses qualify for the credit). If one spouse has no current or unused credit, then the other spouse may use the full $25,000 in determining his or her credit for the tax year. Corporations of a controlled group can divide the $25,000 figure among themselves any way they choose. For estates or trusts, the $25,000 is reduced to a number such that the ratio of that number to $25,000 is the same as the ratio of the estate's or trust's income not allocated to beneficiaries divided by the total income of the estate or trust:
|Trust or Estate Limit |
|=||Income Allocated to Beneficiaries |
After rearranging terms:
|Trust or Estate Limit||=||$25,000 × Income Allocated to Beneficiaries |
So, for example, if a trust or estate distributes all its income to his beneficiaries, then the general business credit can only be applied to those amounts above the full $25,000; if only half is distributed, then the credit can be applied to income above $12,500.
The general business credit is further limited by the entity's net income tax, tentative minimum tax, or net regular tax liability:
Net Income Tax = Regular Tax Liability + Alternative Minimum Tax – Most Nonrefundable Tax Credits
Tentative Minimum Tax = Net Income Tax – Foreign Tax Credit
Regular tax liability is based on the tax table or the tax rate not including certain taxes, such as the alternative minimum tax.
Net Regular Tax Liability = Regular Tax Liability – Most Nonrefundable Credits
The nonrefundable credits include those listed in the Tax and Credits section of Form 1040, such as the credit for child and dependent care expenses and the education credits. Subtracting other tax credits before the general business credit can be applied is so that tax liability is not reduced by too much, as determined by Congress.