What Is the Section 38 General Business Credit?

The General Business Credit, governed by Internal Revenue Code Section 38, is a tax-saving mechanism for businesses. It is not a standalone credit but an umbrella term for dozens of individual business-related tax credits. The primary function of the General Business Credit is to consolidate these various credits and apply a single, uniform limitation on how much they can collectively reduce a taxpayer’s liability in a given year.

If a business is eligible for more than one of these credits, it must aggregate them under the General Business Credit framework. This aggregation is reported on a summary form, which calculates the final, overall allowable credit for the tax year. The system is designed to encourage a wide range of business activities and investments by offering direct, dollar-for-dollar reductions in tax owed.

Component Credits of the General Business Credit

The General Business Credit is composed of a wide array of individual credits. They can be broadly grouped into categories such as those related to investment, employment, and energy, among others.

One category involves investment-related incentives. The Investment Credit (Form 3468), for example, is itself a combination of credits for activities like rehabilitation, energy, and advanced manufacturing projects. The Low-Income Housing Credit (Form 8586) encourages the construction and rehabilitation of affordable rental housing for low-income individuals. Another is the Disabled Access Credit (Form 8826), which helps small businesses cover costs associated with providing access to individuals with disabilities.

Employment-focused credits form another group. The Work Opportunity Tax Credit (Form 5884) provides an incentive for hiring individuals from certain targeted groups who have consistently faced significant barriers to employment. The Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips (Form 8846) is available to certain food and beverage establishments. Businesses can also claim the Employer Credit for Paid Family and Medical Leave (Form 8994) for wages paid to qualifying employees on leave.

Energy and environmental credits are also components. These include:

• The Biodiesel and Renewable Diesel Fuels Credit.
• The Credit for Increasing Research Activities (Form 6765), often called the R&D credit, encourages businesses to invest in innovation and technological advancement.
• The Credit for Small Employer Pension Plan Startup Costs (Form 8881).
• The Credit for Employer-Provided Childcare Facilities and Services (Form 8882).

Calculating the Tax Liability Limitation

A business cannot automatically use the full amount of its combined credits to eliminate its tax bill. The General Business Credit is subject to an annual limitation based on the taxpayer’s tax liability. This limitation prevents the credit from reducing tax liability below a certain threshold, ensuring that businesses still contribute a minimum amount of tax.

The credit is limited to the amount of the taxpayer’s net income tax minus the greater of two amounts: the tentative minimum tax (TMT), or 25% of the net regular tax liability that is over $25,000. Because the tentative minimum tax is a part of the formula, the General Business Credit cannot be used to lower a tax bill below the TMT.

Carryback and Carryforward of Unused Credits

When a business’s calculated General Business Credit exceeds the annual tax liability limitation, the excess amount is not lost. Unused credits can be carried back one year and carried forward for up to 20 years, though some credits have different rules. For instance, certain credits may allow for a three- or five-year carryback period.

The tax code mandates a first-in, first-out (FIFO) method for utilizing credits. This means that in any given tax year, carryforwards from the earliest years are applied first against the tax liability. After all carryforwards are used, the credits generated in the current year are applied, followed by any credits carried back from a future year.

This carryover provision is for businesses with fluctuating income, such as startups or those in cyclical industries. A business might generate significant credits in a year with low or no profit, and therefore little tax liability to offset. The carryback and carryforward rules ensure that these credits can be saved and applied in more profitable years. To initiate a carryback, a business must file an amended return for the prior year.

How to Claim the General Business Credit

To claim the General Business Credit, taxpayers must file Form 3800, General Business Credit, with their income tax return. Before completing Form 3800, a business must first complete the specific source form for each individual credit it intends to claim, such as Form 5884 for the Work Opportunity Credit or Form 3468 for the Investment Credit.

Part I and Part IV of the form are used to account for any credit carryforwards from prior years or carrybacks from future years. Part III is where the current year’s business credits, calculated on their individual source forms, are listed and totaled.

Part II of Form 3800 is where the overall limitation is calculated. This section applies the formula to the taxpayer’s regular tax liability to determine the maximum credit allowed for the year. The final allowable General Business Credit, which is the lesser of the total available credits or the tax liability limitation, is then determined. This final amount is then transferred from Form 3800 to the taxpayer’s main tax return, such as Form 1040 or Form 1120, to reduce the total tax owed.