Optimize Your Manufacturing Company’s Financial Situation by Using the General Business Credit
If you’re a manufacturer, optimizing your business tax credit is key to maintaining good financial health. In general, tax credits are more valuable than tax deductions. Why? Because a credit reduces the company’s overall tax liability on a dollar-for-dollar basis, whereas a tax deduction only reduces the business’ taxable income. Appropriately using both, of course, is the best way to minimize your tax burden overall, understanding that there are specific rules in place to prevent “double-dipping”… specifically, the General Business Credit (GBC).
What is the GBC?
The GBC is a collection of dozens of business-related credits scattered throughout the tax code; it helps you to assess the value of your manufacturing company’s credits. Consisting of more than 30 individual tax credits, the GBC provides incentives for a variety of business activities, some examples of which include: investment credit, research credit, Work Opportunity Tax Credit and Disabled Access Credit. Each credit must be claimed separately using the relevant tax forms (according to the credit’s specific rules), and if more than one credit is claimed, you must also file Form 3800, which reports the aggregate value of the credits and calculates the overall allowable credit under the GBC.
Additionally, to prevent taxpayers from “double-dipping,” the tax code generally doesn’t permit businesses to claim a tax credit and a tax deduction based on the same expenses. Therefore, in general, when a GBC is generated, you must treat a portion of your expenses (equal to the amount of the credit) as nondeductible for that same year. While there are specific formulas to calculate GBC, in short, the GBC limit essentially prevents taxpayers from using credits to avoid Alternative Minimum Tax (AMT).
But there’s good news! If the limits prevent you from using all of the GBC, any unused credit may be carried back one year and then, if unused credit remains, carried forward up to 20 years. If a credit is lost, Section 196 allows the lost credit amount to be claimed as a deduction.
Of course, there are more aspects to consider when applying the GBC to your specific situation, but the overall potential benefit to your company’s bottom line is well worth investigating. Determining a GBC for a given year—including calculating applicable limits—can be complicated. Your CJBS team member can help ensure that your manufacturing company is taking advantage of all the tax credits for which you’re eligible for.