The Small Business Jobs Act of 2010 has been one of many controversial pieces of legislation that have become law this year. Right here on OPEN Forum there were differing opinions on the value and efficacy of the legislation, as you can see here and here. While this debate will continue for some time, business owners need to make decisions on how to take advantage of specific provisions of the law that impact their businesses. Failing to do so may cost you many thousands of dollars or more in potential tax savings.
As 2010 comes to a close, it’s time to take a look at the provision of the law which extends the carryback period for the general business tax credit. How does this provision impact your company’s tax bill? Let’s take it step by step.
How do tax credits work?
Tax credits are a great thing! They are very different than a tax deduction. A tax credit reduces the amount of money you owe in taxes dollar for dollar. For example, if your company had taxable income of $1 million, then using the current tax rate table it would owe $340,250 in income taxes. If the company also qualified for a $40,250 tax credit, then this amount would be subtracted directly from the amount due in taxes. The new amount due would be $300,000, saving your company the full amount of the credit.
This is very different from a tax deduction. Deductions reduce the “taxable income” which serves as the basis for calculating your tax liability. If the $40,250 in this example was instead a deduction, then it would be subtracted from the $1 million, leaving $959,750 in taxable income. This would lead to a $326,656 tax bill. While the deduction still reduces the amount due for taxes, the savings pale in comparison to that offered by the credit.
For many tax credits, there are specific parameters that your company must meet in order to qualify and the amount of the credit may also vary depending on the specifics of your case. Typically a tax form needs to be prepared and included with your tax return showing the calculation for the credit.
What is the general business credit?
The U.S. tax code is filled with many credits that exist for political, economic, social and other reasons. The carryback provision of the 2010 Small Business Jobs Act impacts the “general business credit” of your company. Despite the singular form of the name, the general business credit represents the total dollar value of the credits for which your business qualifies. Each credit has specific requirements for qualification.
Go to the article: Save Taxes With the 5 Year Business Credit Carryback
