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What is a General Business Credit?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 04 November 2016
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The general business credit is an umbrella term for a group of tax credits available to business owners and independent contractors. These credits act as incentives for people running their own businesses, providing them with more cash in hand to operate with. The amount claimed in credit can be deducted directly from the tax due, providing an immediate rebate or discount on taxes for the business owner or independent contractor. This allows businesses to retain funds that they can reinvest in themselves, use to hire employees and create jobs, and invest in their communities.

A number of different credits are available under the general business credit including fuel credits, credits for natural disasters, employment credits, credits for businesses in distressed communities, and investment credits. For each credit, a separate form must be filed to document eligibility, and the credits themselves are listed on another form that is used to calculate the total general business credit available for the year.

There is a limit on the amount people can take as a credit, based on their income. If the number of credits being claimed exceeds this limit, taxpayers are allowed to carry the excess over into another tax year. Thus, the general business credit can include credits carried forward from prior years, in addition to credits for a current year. It is also possible to carryback general business credit, allowing people to claim refunds on prior tax years.

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Businesses that incur expenses or experience events that qualify for the general business credit should make sure they have ample documentation to prove it. This documentation does not need to be filed with the tax paperwork, but will need to be produced in an audit to confirm that the credit was not claimed under false pretenses. People who are not sure about whether or not expenses will qualify can provide an accountant with the documentation and ask for an opinion.

Available credits vary from year to year. Tax preparers usually have a current list of available general business credits and can provide advice on filing for them. It is also possible to order publications directly from tax authorities to get information about the general business credit. These publications also include the necessary forms along with directions on filling them out so that taxpayers can confirm that they are filing properly. Making a mistake will result in a correction from the authorities, and may expose taxpayers to the risk of an audit if the mistake arouses suspicions.

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David09
Post 4

I believe the employment credit is a new business credit that has been made available to small businesses. It’s something like $5,000 offered to small businesses if they hire a new employee.

While other business credits seem to make sense, this one doesn’t to me. An employee is a recurring expense. If you pay that employee $40,000 per year, I don’t think a one-time credit of $5,000 is going to help you much.

Business credits that make sense are those that affect one-time purchases, like eco-friendly products or something like that; in these situations the credit offsets the purchase price, and you’re done with it.

Employee salaries are not only an annual, recurring expense, but most employees will expect an increase in their salaries to account for cost of living adjustments, at bare minimum.

allenJo
Post 3

@miriam98 - I think that risk is the operative word. It can make or break any deal, regardless of how generous the lender may appear to be at first.

A friend of mine started a computer training business and was able to secure a government contract, well before he purchased all of his business assets, like all the computers he needed. He also had two trainers available; but he needed more money.

He approached a banker for an unsecured loan and when the banker saw the government contract in hand, and the availability of the trainers, he was ready to go ahead with the deal.

Later, however, the banker bailed. Why is that? He did a background search and found out the business owner had filed for bankruptcy five years earlier. I guess that was a risk he wasn’t willing to take, no matter how much interest he charged.

miriam98
Post 2

@MrMoody - I think it's great that your business can operate on a cash only business, minus the mortgage on the new building.

Other than operating on a cash only basis, I think that the only true recourse for a business that needs money is to get a secured loan or an unsecured business loan.

Secured business loans require collateral, whereas unsecured loans do not. However unsecured loans usually come at a higher interest rate, depending on the degree of risk involved, but they are approved more quickly.

MrMoody
Post 1

I’m fortunate. I work for a small business that is completely self-funded. They didn’t take out any business loans to finance their operation-not that there’s anything wrong with that, that’s just what we’ve been able to do. We sell specialized software to industries and it’s priced at a level that is sufficient to pay for the employees we have.

On second thought, we recently moved into a new building, and I believe we do have a loan on that. Other than that, however, we have no other loans.

I think that’s a good position to be in, whether you’re a business or an individual, because when you don’t have to service debt, you have a stronger profit margin.

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