Whether adding employees, purchasing capital equipment or researching ways to develop new technologies and create new products, businesspeople who invest in their own companies or establish new enterprises drive the economy in ways that extend well beyond their own industries.
According to Amy Lee, tax manager for Tauber & Balser PC, an Atlanta-based accounting and consulting firm whose clients include public and private firms in the construction, hospitality, manufacturing, real estate, professional services, not-for-profit and technology industries, the federal government offers a variety of incentives that encourage business owners to keep their own economic engines humming.
Known as general business tax credits, these incentives are connected to investment and reinvestment activities ranging from work force expansion to the use of alternative power options.
Smart Business spoke with Lee about how general business tax credits help businesspeople grow and improve their own enterprises while playing a part in boosting national and local economies.
What are general business tax credits?
General business tax credits are a series of credits offered by the federal government that are designed to stimulate and encourage certain segments of the economy by directly reducing a business’s tax liability.
Each credit has its own characteristics, requirements, qualifications and tax benefits. They provide tax incentives to business owners who engage in certain activities that benefit the community and serve other useful purposes.
How does a tax credit differ from a tax deduction?
A tax credit is a dollar-for-dollar reduction in the actual tax owed. A tax deduction only reduces the amount of income that is taxable; therefore, the amount of tax reduced is based on the tax rate of the business.
For example, if a business is in a 25 percent tax bracket, a $100 tax deduction will reduce the tax liability by only $25. However, a $100 tax credit will reduce the tax liability by $100.
What are some examples of general business tax credits?
Examples of tax credits that benefit certain disadvantaged groups are the work opportunity credit and the disabled access credit. The work opportunity credit may be available to employers who hire people that have a particularly high unemployment rate or with special employment needs. The disabled access credit may be eligible to small-business owners who incur expenses in providing access to disabled persons.
There are also tax credits that encourage energy conservation and other activities that benefit the environment. In fact, the recently passed Energy Incentives Act of 2005 was designed to promote energy conservation. One of the credits under the energy bill is the alternative motor vehicle credit, which provides a tax credit to business owners who purchase new, dedicated alternative-fuel vehicles after Jan. 1, 2006.
The energy-efficient home credit is available to home construction contractors who build qualified new, energy-efficient homes acquired after Dec. 31, 2005, for principal residence use.
Are there general business tax credits connected to specific industries?
Although most credits encourage certain types of activities, some tax credits tend to be more specific to certain industries. The employer Social Security credit, widely used by the hospitality industry where tipping is customary, is a tax credit generally equal to the employer’s portion of Medicare and Social Security taxes paid on tips received by employees.
How do you claim a general business tax credit?
To claim a current general business tax credit, business owners must file a tax form specific to each individual tax credit. Any unused credit can be carried back for one year, then forward for 20 years.
If a carryback or carryfoward tax credit is available, then a Form 3800 (General Business Credit) must be filed. Form 3800 must also be filed when more than one tax credit is being claimed (with a few exceptions), or if any credits are being claimed from passive activities.
How can business owners identify and pursue general business tax credits most appropriate for their businesses?
The best way is to seek the advice of a consultant such as a CPA. General business tax credits can help all businesses that qualify for them, but particularly small-business owners by providing breaks they need to sustain continuity and growth.
Be aware that some of these credits expired on Dec. 31, 2005. However, there may be an opportunity to amend prior-year tax returns to take advantage of general business tax credits. A complete listing of all the general business tax credits and more detailed information pertaining to them can be found under the Internal Revenue Code Section 38.
Amy Lee, CPA, is a tax manager at Tauber & Balser PC. She has extensive experience involving tax planning issues and compliance for small to medium-sized businesses with an expertise in the restaurant industry. Reach her at (404) 814-4904 or firstname.lastname@example.org.