Understanding the General Business Credit: Maximizing Business Tax Savings

The general business credit, or GBC, isn’t a single credit, it’s a collection of more than 30 credits aimed at encouraging business investments, hiring, innovation and more. Each credit has unique rules and must be claimed on its own tax form. If you’re claiming more than one, you must also file IRS Form 3800, which aggregates all your credits and calculates your allowable amount under GBC limits.

Your general business credit limit is calculated as the excess (if any) of your net income tax over the greater of:

• Your tentative alternative minimum tax (AMT) for the year, or

• 25% of the amount by which your net regular tax liability exceeds $25,000.

Definitions matter here:

• Net income tax is your regular tax plus AMT, minus non-GBC credits.

• Net regular tax liability is regular tax liability minus certain other credits.

The GBC rules help prevent taxpayers from using credits to completely avoid the AMT. For C corporations, the corporate AMT was repealed under the Tax Cuts and Jobs Act (TCJA). However, a new corporate minimum tax applies to companies with average book profits over $1 billion (which took effect in 2023). This new tax generally doesn’t restrict the GBC.

For individuals, including sole proprietors, S corporation shareholders and partners, AMT still applies. However, the TCJA raised exemption thresholds, making AMT less common.

What Happens to Unused General Business Credits?

If you can’t use all of your GBC in a given year, you don’t lose out. Instead, the unused credits may be carried back one year; if still unused, they can be carried forward up to 20 years.

GBCs are applied in the following order:

1. Carryforwards (starting with the oldest)

2. Current year credits

3. Carrybacks

This first-in, first-out (FIFO) method helps prevent credits from expiring. Still, large surpluses risk being lost if not used within 20 years. Fortunately, the tax code offers some relief.

Can You Deduct Expired Business Credits?

Generally, the tax code disallows using the same expense for both a credit and a deduction. So, when a GBC is earned, a corresponding portion of the expense is treated as nondeductible.

However, under Section 196, if a credit expires unused (for example, after 20 years or upon a business’s closure), it may become deductible. In such cases, a business may take the Sec. 196 deduction in the year after the credit expires or the year of death or dissolution.

This can be a powerful tool, especially for C corporations being sold. For example, if a buyer elects to treat a stock purchase as an asset sale for tax purposes (commonly triggering large gains), an unused GBC deduction may offset those gains.

What’s Included in the General Business Credit?

Here are just some of the credits that fall under the GBC umbrella:

• Research credit

• Work Opportunity credit

• Disabled access credit

• Investment credit

• Low-income housing credit

• New energy-efficient home credit

• Orphan drug credit

• Renewable electricity production credit

• Employer credit for paid family and medical leave

• Employer-provided childcare credit

• Small employer pension plan startup credit

• Small employer health insurance credit

• Alcohol fuels credit

• Empowerment zone employment credit

• Credit for employer Social Security and Medicare taxes paid on certain employee tips

• Alternative fuel vehicle and electric vehicle credits (partial)

Each of these supports different business goals—from job creation and R&D to clean energy investments.

Maximize Your Tax Savings with GBCs

Navigating the general business credit and its limitations requires strategic planning. Work with your tax advisor to ensure you’re claiming all the business tax credits available to you and using them wisely.

Contact a James Moore professional to learn how we can help you optimize your tax position through GBC planning and compliance.

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