by Karen Murphy, MostChoice.com Tax credits are the direct dollar-for-dollar reduction of your tax liability. What this means to you is that unlike deductions, credits are subtracted directly from your tax bill. In other words, a dollar's worth of tax credit reduces your tax bill by one dollar. In comparison, deductions are subtracted from the income on which your tax bill is based. A dollar's worth of deductions lowers your tax bill by 34 cents if you're in the 34 percent bracket, by 26 cents if you're in the 26 percent bracket, etc. So, why aren't more businesses taking advantage of income tax credits? For one, the government makes tax credits available on very limited situations. Most are targeted to encourage certain social or environmental actions. In addition, if you're business happens to be a part of one of these limited situations, the rules governing income tax credits are extremely complicated. In fact, it is highly advisable to consult with an expert who can make sense of all the intricacies that are a common part of all income tax credits. Of course, you can't find a much better option for reducing tax liabilities and enhancing corporate profitability. For those that can take advantage of them, several federal income tax credits are made available to businesses under a category called general business credit. They include: - Investment credit (rehabilitation, energy and reforestation)
- Work opportunity credit
- Welfare-to-work credit
- Alcohol fuels credit
- Disabled access credit
- R & D credit
- Enhanced oil recovery credit
- Low-income housing credit
- Renewable-resource electricity production credit
- Empowerment zone credit
- Indian employment credit
- Employer FICA credit on tips
- CDC credit
As is the case with all income tax credits, the rules governing general business credit can be extremely complicated. However, there are a few basic rules regarding general business credits. Dollar limitations. There are dollar limits to the amount of credits you can claim for a year. Your total general business credit for the year cannot exceed your net income tax, minus the greater of either your tentative minimum tax or 25% of your net regular tax liability that is more than $25,000. Your net income tax is your net regular tax liability plus your alternative minimum tax. Forms. Most credits use their own special IRS forms. If you claim more than one of the components of the general business credits, you will also need Form 3800, General Business Credit, to compute any limitations on the combined credit components. Multiple Claims. If you claim more than one of these credits for the year, you must claim them in the prescribed order outlined in the form. Thus, if you exceed your credit dollar limit for the year, the credits further down the list will be the ones that are carried back or carried over to other years. Carrybacks and carryforwards. Dollar limitations may prevent you from claiming all of your credits in the year they are earned. If this is the case, you have the option of carrying it back to the year preceding the credit year, or forward to the following 20 years. | General Business Credits The Investment Tax Credit. This is a credit against your federal income tax. It includes the rehabilitation credit, the energy credit and the reforestation credit. Rehabilitation credit. This allows you to take a tax credit for renovating, restoring or rehabilitating certain structures, such as older real estate or certified historic buildings. Energy credit. This allows a credit for a percent of the cost of equipment associated with solar or geothermal energy. It includes equipment that uses solar energy to: generate electricity; heat or cool a structure; provide hot water; or provide solar process heat. It also includes equipment used to produce, distribute, or use geothermal energy stored in rocks, water, or steam. Reforestation credit. This applies a credit for a certain percentage of the expenses incurred each year to forest or reforest your property. Your property must be used to grow trees for sale or use in the commercial production of timber products. Research and development (R&D) credit. This is a tax credit for a percent of the amount spent on research and experimental activities. Orphan drug credit. Designed to encourage development of drugs for rare diseases and conditions, this credit is equal to a percent of the qualified clinical testing expenses. Credit for qualified electric vehicles. If your electric vehicle qualifies, you can receive a tax credit for a percent of the purchase price. Alternative fuels credit. This is a tax credit for producers of " alternative fuels." Producers can receive a tax credit for the domestic production and sale of these fuels. Alcohol fuels credit. Producers of alcohol fuels or mixtures such as gasohol or ethanol can receive a tax credit for any sale or use of such fuels. Welfare-to-work tax credit. A tax credit is provided to employers who hire qualified long-term family assistance recipients. The credit is equal to a percent of wages in the first and second year, for a two-year maximum credit. It is available for employees hired after Jan. 1, 1998, and before July 1, 1999. Credit for FICA tax on tips. If your business provides food or beverages for customers to consume on or off the premises, and if your waiters, waitresses or delivery personnel are tipped by your patrons, you're entitled to a tax credit for any FICA taxes you pay on the tips. Gasoline tax credit. You can claim a credit for any federal excise taxes you pay on fuel for certain purposes including: farming; non-highway purposes of your business; bus transportation for intercity, local or school purposes; and for export or foreign trade. Foreign tax credit. This includes credit for foreign income taxes, or taxes imposed by possessions of the U.S., that you paid or accrued during the tax year. Credit for prior years' AMT. If you paid alternative minimum tax in a prior year, you could be eligible for a credit for a portion of that tax. |
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