Business Tax Credits

Business tax credits are credits that are available to businesses when they file their annual tax return with the Internal Revenue Service (IRS). The credits are used to offset a company’s financial obligation to the federal government.

Business tax credits can come in many forms, but some of the available credits are investment, work opportunity, welfare-to-work, alcohol fuels, research and experimentation, low-income housing and enhanced oil recovery. These credits must each be claimed on a specific form that can be found on the IRS website, or by consulting with an accountant or licensed tax professional. The available credits, as well as their applicable forms, may change from year to year, so it is important to consult with the IRS web site before filing.

Business tax credits are used to lessen the tax obligation that a business may incur. Ideally, a business will try and use all credits that they are qualified to use to reduce the amount of money they owe the federal government come tax time. Credits and reductions are applied directly against the money that a business owes.

If a business has exceeded their tax credits for the current tax year, but not the prior year, they may carry those credits backwards and apply them to the tax returns that they have already filed. In the same vein, if they have more credits than are permitted in the current tax year, they may carry the balance of those credits into the next tax year. This is called a carryforward.  

As an example, the ABC Corporation is in the process of filing their annual tax return. They are going through the list of available tax credits and have realized that they may claim the Credit for Employer-Provided Childcare Facilities and Services, since they have an on-site daycare. Using Form 8882, they list this credit. However, the amount of money that they are claiming is higher than this year’s allowable amount. Since this tax year was the first year they provided on-site daycare services, they can retroactively apply a portion of the credit to the prior tax year.

However, ABC Corporation is not done, and they have discovered that they are also able to claim some additional tax credits. Since they have maxed out their credits for this year they are applying the remainder of those credits to the following tax year. With all the available business tax credits they were able to take this year, ABC Corporation owed a much smaller amount to the government this year. Next year, they will already have several credits to apply to their remaining obligation, even if they don’t have any new tax credits to claim.