A Simple Guide to Small Business Tax Credits

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Tax season is upon us, and it's time to work our brains around what applies to us and what doesn't. The tax code can look like a labyrinth, and we are here to decode its mysteries. 

There are certain things you need to know when it comes to small business tax credits. Check out our guide to learn more.


What are Business Tax Credits? 

When businesses file their annual tax return to the IRS, they are eligible for credits that alleviate their financial obligations to the federal government. 


Demystifying Business Tax Credits

Tax language can seem like hieroglyphics at times. We are here to translate. There are many forms of business tax credits. A few examples to check include investment, work opportunity, welfare-to-work, alcohol fuels, r&d tax relief eligibility, low-income housing, and enhanced oil recovery.

Each of these credits requires a specific form that you can find on the IRS's website. You can also consult an accountant or a licensed tax professional if you want to make the process easier. Business tax credits, as well as their specific forms, are subject to change year to year. To avoid misfiling, refer to the IRS website.

Business tax credits eliminate certain tax obligations for businesses that apply. These credits reduce the amount of money the company owes to the federal government.

Businesses may exceed their tax credits for the current year and still be able to apply those credits to return years they already filed. Companies may also carry over tax credits they can't apply to the current year, and use them for a future year. This process is known as a carryforward. 


Small Business Tax Credits vs. Tax Deductions

Small business tax credits apply to businesses engaging in activities that benefit the economy or society. Small business tax credits are not to be confused with tax deductions. 

Tax deductions refer to claims made by companies for ordinary business expenditures. These are known as "write-offs" and have nothing to do with the benefit of society. 

Specialized deductions apply to specific businesses, such as home-based businesses. Deductions minimize your taxable income and affect which tax bracket you report.


How to Claim Small Business Tax Credits

If you’re planning on applying more than one tax credit to your return, you must submit an IRS Form 3800 with your tax return. This form lists all of your desired small business tax credits. You can calculate your General Business Tax Credit by then adding the total credits.

To calculate your limit of small business tax credits, use the following 2 step process.

1. Add your net income tax and alternative minimum tax.

2. Subtract the greater of either your tentative minimum tax for the tax year or 25% of the amount of your regular tax liability that’s greater than $25,000.

Consult With a Tax Professional Today 

Consult a tax professional before filing a return to figure out which business tax credits apply best to your company. Tax credits often expire and interchange, so it's essential to have a professional guide you on your business tax credit journey.