What is the general business credit?

Ines Zemelman, EA
Ines Zemelman, EA
• 10.07.24 • 5 mins read
Tax documents illustration on a violet background in minimalist style

If you run a small business, effective tax planning can help you lower your tax bill and avoid unexpected taxes. The US government offers several tax deductions and credits to help you keep more of your hard-earned money. 

One of the most important is a general business tax credit. It is a collection of credits encouraging specific business activities, from research and development to energy efficiency improvements.

This article will explain how the general business tax credit works. We will cover businesses' eligibility, limitations, and the process for calculating and claiming the credit.

What is the general business credit (GBC)?

The general business credit is a tax credit that eligible businesses can claim on their federal income tax returns. 

This credit offers different incentives to businesses to encourage activities that benefit the economy, such as investment in renewable energy and hiring certain types of employees. These incentives are all combined in the general business credit.

The general business credit is nonrefundable – it can only reduce your tax liability to zero. In contrast, refundable credits provide any remaining credit as a refund. 

What types of businesses qualify for GBC?

The following types of tax entities qualify for the general business tax credit:

  • closely held corporations and S corporations
  • partnerships
  • sole proprietorship
NOTE

The average annual gross receipts of the corporation, partnership, or sole proprietorship for the three-tax-year period preceding the tax year of the credit can not exceed $50 million. 

What tax credits does the GBC include?

The Internal Revenue Service (IRS) recognizes over 30 business tax credits. 

Some of the more popular credits included in the general business tax credit are:

  • Investment credit
  • Work opportunity credit 
  • Credit for increasing research activities
  • Small employer health insurance premiums credit 
  • Credit for small employer pension plan startup costs 
  • Employer credit for paid family and medical leave
  • Disabled access credit 
  • Employer-provided childcare facilities and services credit 
  • Employer credit for social security and medicare taxes paid on employee tips
  • Empowerment zone employment credit 
  • New markets credit 
  • Credit for employer differential wage payments
  • Qualified commercial clean vehicle

Be sure to keep this in mind: There are numerous business credits available. Check the IRS website for a comprehensive list of qualifying credits, and consult with a TFX tax professional to determine which ones you may be eligible for.

What are the limitations of the general business credit?

The general business tax credit has limitations, meaning you might have many credits, but you can only claim some for a given tax year.

The GBC is limited to net income tax reduced by greater of tentative minimum tax or 25% of net regular tax liability that exceeds $25,000.

Example of the GBC calculation

Let's dissect how a business owner calculates its general business credit for the current year. The numbers are provided here for calculation purposes only.

Given data:

  • total GBC for the year: $50,000
  • net income tax: $150,000
  • tentative minimum tax: $135,000
  • net regular tax liability: $140,000

Steps to determine the claimable general business tax credit

Step 1: Calculate 25% of net regular tax liability that exceeds $25,000.

(net regular tax liability – $25,000) x 0.25 = ($140,000 – $25,000) x 0.25 = $28,750

Step 2: Identify the greater value.

  • tentative minimum tax: $135,000
  • 25% of net regular tax liability exceeding $25,000: $28,750
  • greater value: $135,000

Step 3: Subtract the greater value from net income tax to identify the credit.

net income tax – greater value = $150,000 – $135,000 = $15,000

You can claim $15,000 of the total $50,000 GBC for the current year.

What happens to the unused $35,000? Most eligible credits can be carried back for one tax year to decrease the tax liability during that period. Furthermore, most unused credits can be carried forward for up to 20 years.

The IRS classifies certain credits, such as the investment credit, as "carryforward only," meaning they can only be applied to future tax years.

How to claim the general business credit

Businesses typically use Form 3800 to calculate and claim the general business credit. However, each specific credit within the general business credit framework requires its own form. For example, if you claim the work opportunity tax credit, you must file Form 5884 along with Form 3800.

For corporations and sole proprietorships, the deadline to file Form 3800 for the 2024 tax year is April 15, 2025. For partnerships and S corporations, the deadline is March 17, 2025. Specific deadlines apply to the various credits that make up the GBC.

The general business tax credit may be complex and time-consuming to calculate, but it has the potential to save you thousands of dollars in taxes. Partner with TFX tax professionals to create a comprehensive tax strategy, allowing you to concentrate on what matters most: your clients, your employees, and the growth of your business.

Focus on your business. Partner with professionals for taxes.

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FAQ

1. What is the general business credit?

The general business credit is a collection of tax credits eligible businesses can claim on their federal income tax returns. These credits incentivize activities beneficial to the economy, such as research and development, investment in renewable energy, and hiring certain types of employees.

2. Who qualifies for a general business credit?

Closely held corporations, S corporations, partnerships, and sole proprietorships qualify for the general business credit, provided their average annual gross receipts do not exceed $50 million for the three-tax-year period preceding the tax year of the credit.

3. Are general business credits refundable?

No, general business credits are nonrefundable: They can only reduce your tax liability to zero. Any remaining credit cannot be refunded but may be carried back or forward to other tax years.

4. Can I carry back a general business credit?

Yes, most eligible credits can be carried back one tax year to decrease the tax liability for that period. This allows businesses to utilize the credit more flexibly based on their tax situation.

5. How long can general business credits be carried forward?

Most unused general business credits can be carried forward for up to 20 years. However, specific carryforward rules can vary depending on the individual credit.

6. How much is the general business credit?

The general business credit is the sum of individual eligible credits. Still, it is limited to the net income tax reduced by the greater of the tentative minimum tax or 25% of the net regular tax liability exceeding $25,000.

7. What are the general business credits reported on Form 3800?

Form 3800 consolidates and reports various credits, including investment credit, work opportunity credit, credit for increasing research activities, small employer health insurance premiums credit, and many others.

8. Can you take a general business credit on passive loss?

Generally, the general business credit cannot be used to offset passive activity losses. The credit can only be applied to the extent that the taxpayer has passive income from the same activity. Any unused credits may be subject to carryforward rules.

Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Always consult with a tax professional regarding your specific case. 

Further reading

Maximizing small business tax credits: a comprehensive guide
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