Business tax credits

If you run a small business or are self-employed, your tax liability may be higher than if you receive your checks from an employer’s payroll. However, there are many tax credits available from the IRS to offset this, which apply to large companies as well as small businesses.

Most of these tax credits will fall under the jurisdiction of either Tax Form 3800 (which is used to claim general business tax credits) or Tax Form 3468 (which is used to claim the “investment credit” composed of the reforestation tax credit, the rehabilitation tax credit and energy tax credits).

The Rehabilitation Tax Credit allows you to deduct the expenses of rehabilitating, renovating, or restoring a historic building. Adding new construction to the building does not count for this tax credit. If the building is listed in the National Register of Historic Places, you can deduct up to 20 percent of the cost, and any building that began use before 1936 is eligible for a tax deduction of 10 percent.

The Reforestation Tax Credit allows timber producers involved in a commercial operation to deduct up to 10 percent of the costs associated with reforestation, which includes labor, tools, and depreciation on equipment.

Energy tax credits encourage investment in renewable energy sources and other environmentally friendly measures. The Business Energy Tax Credit allows you to deduct up to 10 percent of the cost of running a solar or geothermal generator as depreciable business property. The IRS may be able to recapture your tax deduction if you dispose of (or sell) your generator within a certain period.

Another energy tax credit (currently scheduled to terminate at the end of 2010) rewards producers of alcohol-based fuels. This is called the Alcohol Fuels Tax Credit and has its own form, Tax Form 6478.

Another tax credit under the umbrella of “general business tax credits” is the Indian Employment Tax Credit, which rewards employers hiring on, or near, an Indian reservation. The eligible employee, or their spouse, must be a member of a registered Indian tribe for this tax credit to apply. Employers can deduct up to 20 percent of the employee’s wages or health insurance costs.

Most credits that are considered “general business tax credits” are eligible to be carried back one year, or carried forward for up to twenty years, from the year in which they were earned. This means that even if the amount of the tax credit exceeds what you owe or what you are allowed to deduct that year, you can use it to offset your tax burden in future years.

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