Business Tax Preparation · Business expenses, deductions and credits

General business credits

Verification 2026 Verified
tax year · reviewed 2026-08-21 · Draft for I. Ohu review

The general business credit is not a credit. It is a container: a long list of separate credits, each with its own eligibility rules, added together and then subjected to a single limitation and a single carryover regime. Almost every question is either about one component or about the container.

The rule

What it is. the sum of the business credit carryforwards carried to the year, the current year business credit, and the business credit carrybacks carried to the year^TY2026 (IRC § 38(a)). The current year business credit is itself the sum of the credits listed in IRC § 38(b), which runs to dozens of paragraphs.

The cap. the credit may not exceed the excess of net income tax over the greater of the tentative minimum tax or 25 percent of so much of net regular tax liability as exceeds $25,000^TY2026 (IRC § 38(c)(1)).

What happens to the excess. a business credit carryback to the taxable year preceding the unused credit year, and a business credit carryforward to each of the 20 taxable years following it^TY2026 (IRC § 39(a)(1)).

Disabled access. 50 percent of the eligible access expenditures for the taxable year that exceed $250 but do not exceed $10,250 — a maximum credit of $5,000^TY2026 (IRC § 44(a)), available to a person whose gross receipts for the preceding taxable year did not exceed $1,000,000, or which employed not more than 30 full-time employees during that year, and which elects the section — an employee being full-time if employed at least 30 hours a week for 20 or more weeks in the year^TY2026 (IRC § 44(b)).

Research. 20 percent of the excess of qualified research expenses over the base amount, plus 20 percent of basic research payments, plus 20 percent of amounts paid to an energy research consortium for energy research^TY2026 (IRC § 41(a)), and domestic research or experimental expenditures otherwise deducted or charged to capital account are reduced by the amount of the IRC § 41(a) credit, unless the taxpayer elects a reduced credit instead^TY2026 (IRC § 280C(c)).

Small employer health insurance. 50 percent, or 35 percent for a tax-exempt eligible small employer, of the lesser of the nonelective contributions actually made for premiums for qualified health plans offered through an Exchange, or what would have been contributed at the average small group market premium for the rating area^TY2026 (IRC § 45R(b)), available to an employer with no more than 25 full-time equivalent employees, average annual wages not exceeding twice the indexed dollar amount, and a qualifying arrangement in effect^TY2026 (IRC § 45R(d)(1)).

The foreign tax credit is not in the container. IRC § 901 sits in subpart A, and IRC § 38(c)(1) computes net income tax after “the credits allowable under subparts A and B” — so the foreign tax credit is taken first and reduces the room available for the general business credit.

Current figures

Item	Rule	Authority
What the credit is	the sum of the business credit carryforwards carried to the year, the current year business credit, and the business credit carrybacks carried to the year^TY2026	IRC § 38(a)
The limitation	the credit may not exceed the excess of net income tax over the greater of the tentative minimum tax or 25 percent of so much of net regular tax liability as exceeds $25,000^TY2026	IRC § 38(c)(1)
Carryback and carryforward	a business credit carryback to the taxable year preceding the unused credit year, and a business credit carryforward to each of the 20 taxable years following it^TY2026	IRC § 39(a)(1)
Disabled access credit	50 percent of the eligible access expenditures for the taxable year that exceed $250 but do not exceed $10,250 — a maximum credit of $5,000^TY2026	IRC § 44(a)
Who qualifies for it	a person whose gross receipts for the preceding taxable year did not exceed $1,000,000, or which employed not more than 30 full-time employees during that year, and which elects the section — an employee being full-time if employed at least 30 hours a week for 20 or more weeks in the year^TY2026	IRC § 44(b)
Research credit	20 percent of the excess of qualified research expenses over the base amount, plus 20 percent of basic research payments, plus 20 percent of amounts paid to an energy research consortium for energy research^TY2026	IRC § 41(a)
No double benefit	domestic research or experimental expenditures otherwise deducted or charged to capital account are reduced by the amount of the IRC § 41(a) credit, unless the taxpayer elects a reduced credit instead^TY2026	IRC § 280C(c)
Small employer health credit	50 percent, or 35 percent for a tax-exempt eligible small employer, of the lesser of the nonelective contributions actually made for premiums for qualified health plans offered through an Exchange, or what would have been contributed at the average small group market premium for the rating area^TY2026	IRC § 45R(b)
Who qualifies for it	an employer with no more than 25 full-time equivalent employees, average annual wages not exceeding twice the indexed dollar amount, and a qualifying arrangement in effect^TY2026	IRC § 45R(d)(1)

How it works in practice

Compute the components, then the container. Each credit in IRC § 38(b) has its own computation, its own eligibility rules and often its own form. They are added together into the current year business credit, and only then does IRC § 38(c)(1) test the total against tax liability. A business with two credits does not test them separately.

The limitation has a floor built into it. the credit may not exceed the excess of net income tax over the greater of the tentative minimum tax or 25 percent of so much of net regular tax liability as exceeds $25,000^TY2026 (IRC § 38(c)(1)). Read the second limb carefully: the reduction bites only on net regular tax liability above the statutory floor. The consequence is that a business with regular tax liability at or below that floor can use the credit against the whole of it, and above it a quarter of the excess is protected from the credit.

Nothing is refundable. The general business credit reduces tax to zero at most. That is why IRC § 39 matters so much: a business credit carryback to the taxable year preceding the unused credit year, and a business credit carryforward to each of the 20 taxable years following it^TY2026 (IRC § 39(a)(1)). One year back, twenty years forward, and the order in IRC § 39(a)(2) is earliest first.

The disabled access credit is small, capped, and elective. 50 percent of the eligible access expenditures for the taxable year that exceed $250 but do not exceed $10,250 — a maximum credit of $5,000^TY2026 (IRC § 44(a)). Note the shape: spending below the lower figure gives nothing and spending above the upper one gives nothing more, so the credit has a hard ceiling however much is spent. And a person whose gross receipts for the preceding taxable year did not exceed $1,000,000, or which employed not more than 30 full-time employees during that year, and which elects the section — an employee being full-time if employed at least 30 hours a week for 20 or more weeks in the year^TY2026 (IRC § 44(b)) confines it to a genuinely small business, on either of two alternative tests, and requires an election.

The research credit and the deduction are alternatives, not both. domestic research or experimental expenditures otherwise deducted or charged to capital account are reduced by the amount of the IRC § 41(a) credit, unless the taxpayer elects a reduced credit instead^TY2026 (IRC § 280C(c)). The default is that the deduction for the same expenditure is reduced by the credit; the taxpayer may instead elect a reduced credit and keep the full deduction. Which is better depends on the taxpayer’s marginal rate, and the election is made on a timely filed return.

The small employer health insurance credit is narrow and hard to qualify for. an employer with no more than 25 full-time equivalent employees, average annual wages not exceeding twice the indexed dollar amount, and a qualifying arrangement in effect^TY2026 (IRC § 45R(d)(1)) requires no more than 25 full-time equivalent employees, average wages below a ceiling, and a qualifying arrangement, and IRC § 45R(c) phases the credit out as either measure rises. It is also confined to a credit period, and to premiums for qualified health plans offered through an Exchange — a condition that excludes most employer plans as a practical matter.

The foreign tax credit is a different animal. It is not a component of the general business credit at all. It sits in subpart A, is taken before the general business credit, and reduces the net income tax figure against which IRC § 38(c)(1) measures. A business with a large foreign tax credit therefore has less room for its general business credits, without either credit being disallowed as such.

Two credits, one limitation

A corporation has regular tax liability of $185,000, no tentative minimum tax exposure, and no subpart A or B credits. It generates a $28,000 research credit and a $5,000 disabled access credit in the same year.

The current year business credit is $33,000 — the two are added, not tested separately.

the credit may not exceed the excess of net income tax over the greater of the tentative minimum tax or 25 percent of so much of net regular tax liability as exceeds $25,000^TY2026 (IRC § 38(c)(1)): net income tax is $185,000. The second limb is a quarter of the excess of $185,000 over the statutory floor, a quarter of $160,000 — $40,000. The greater of the tentative minimum tax (nil) and $40,000 is $40,000, so the limitation is $185,000 less $40,000, or $145,000.

The whole $33,000 is used. Note the structure: the limitation is generous for a profitable business, and the $25,000 floor means a small business with modest liability faces no reduction at all.

Reverse the facts: give the corporation regular tax liability of $18,000, below the floor. The second limb is a quarter of nothing, so the limitation is the whole $18,000. The credit is used to that extent, and a business credit carryback to the taxable year preceding the unused credit year, and a business credit carryforward to each of the 20 taxable years following it^TY2026 (IRC § 39(a)(1)) sends the remaining $15,000 back one year and then forward for twenty.

The ramp that cost twenty thousand

A café with gross receipts of $780,000 spends $20,000 installing an accessible entrance, an accessible lavatory and induction loop equipment.

a person whose gross receipts for the preceding taxable year did not exceed $1,000,000, or which employed not more than 30 full-time employees during that year, and which elects the section — an employee being full-time if employed at least 30 hours a week for 20 or more weeks in the year^TY2026 (IRC § 44(b)) is satisfied on the first alternative — gross receipts for the preceding year did not exceed $1,000,000 — so the business need not count employees at all. It elects the section.

50 percent of the eligible access expenditures for the taxable year that exceed $250 but do not exceed $10,250 — a maximum credit of $5,000^TY2026 (IRC § 44(a)) gives half the expenditures within the statutory band, so the credit is $5,000 — the maximum — and the rest of the spending generates no credit.

The rest is not wasted: the portion not taken into account for the credit is recovered under the ordinary rules, as a deduction under IRC § 190 for architectural barrier removal to the extent that section applies, or otherwise capitalised into the building and depreciated. IRC § 44(d)(7) denies a double benefit for the amount that produced the credit.

Note how easily a business fails the eligibility test. Receipts of $1,100,000 with 40 full-time employees fails both alternatives and gets no credit at all, on identical spending.

Credit or deduction, on the same research

A software company has $600,000 of domestic research or experimental expenditures and computes a $74,000 research credit under IRC § 41(a). Its marginal federal rate is 21 percent.

Default treatment. domestic research or experimental expenditures otherwise deducted or charged to capital account are reduced by the amount of the IRC § 41(a) credit, unless the taxpayer elects a reduced credit instead^TY2026 (IRC § 280C(c)(1)) reduces the deductible expenditure by the credit: it deducts $526,000 rather than $600,000, and takes the full $74,000 credit. The lost deduction costs it 21 percent of $74,000, or $15,540, so the net benefit is $58,460.

Reduced credit election. IRC § 280C(c)(2) lets it keep the full $600,000 deduction and take a reduced credit instead. The reduction is calibrated so that the two routes are close to equivalent at the corporate rate, which is why the election is usually made for administrative convenience — one figure on the return instead of two — rather than for a material difference in tax.

The election matters far more for a pass-through whose owners are at higher individual rates, where the value of the forgone deduction and the size of the reduction do not match.

Note the drafting: IRC § 280C(c)(1) now speaks of “domestic research or experimental expenditures (as defined in section 174A(b)),” a section that did not exist before July 2025.

Traps.

It is one credit, not many. {fig:gbc.components} (IRC § 38(a)). The components are added and the limitation is applied once to the total.

None of it is refundable. The credit reduces tax, never below zero. An answer offering a refund of an unused general business credit is wrong.

The carryback is one year and the carryforward twenty. {fig:gbc.carryback_forward} (IRC § 39(a)(1)). Not the indefinite carryforward that applies to net operating losses.

The disabled access credit is capped at a small figure. {fig:gbc.access_credit} (IRC § 44(a)) — the expenditure band is narrow, so the credit has a low ceiling whatever the spending.

A credit for an expense costs the deduction. {fig:gbc.research_no_double} (IRC § 280C(c)). The taxpayer may elect a reduced credit instead, but cannot have both in full.

The foreign tax credit is not a general business credit. It is a subpart A credit taken earlier, and it reduces the net income tax against which IRC § 38(c)(1) measures.

How this has changed

The research credit’s interaction with the deduction was rewritten in 2025 without changing the credit. IRC § 280C(c)(1) formerly reduced “the amount of research or experimental expenditures otherwise taken into account”; it now reads “the domestic research or experimental expenditures (as defined in section 174A(b)).” That change followed Pub. L. 119-21 § 70302, which added IRC § 174A allowing a current deduction for domestic research and left foreign research under IRC § 174’s capitalisation regime. The credit under IRC § 41 was untouched, but the expenditure it reduces is now defined by a section that did not exist a year earlier.

The credit limitation itself has not moved. IRC § 38(c)(1) has read in its present form since the alternative minimum tax provisions were rewritten in 2017, and the floor within it has never been indexed — a figure that has stood since 1986 and whose real value has fallen sharply since.

Two of the component credits on this page are frozen in the same way. The IRC § 44 expenditure band has never been indexed, so the maximum credit has been the same since the section was enacted. The IRC § 45R average wage ceiling is indexed by cross-reference, but the 25 full-time equivalent employee test is not, and the Exchange condition has confined the credit to a small population since 2014.

The general lesson for a preparer is that the container is stable and the components move. The question to ask each year is not how IRC § 38 works but whether the particular credit still exists and on what terms — several of the paragraphs in IRC § 38(b) are for credits that have expired and remain listed only because carryforwards survive them.

Exam focus

Know the structure: components added, single limitation, one year back and twenty forward. Most questions about “the general business credit” as such are testing one of those three.

Know that the limitation is expressed as net income tax less the greater of tentative minimum tax and a share of net regular tax liability above a statutory floor, and that the floor means a small liability is fully available.

For the component credits, learn the eligibility conditions rather than the arithmetic. The disabled access credit turns on gross receipts or employee count and an election; the small employer health credit turns on employee count, average wages and an Exchange plan.

Finally, expect a no-double-benefit question. A credit for an expenditure normally costs the deduction for the same expenditure, with an election to take a reduced credit instead.

Check yourself

1. A business has regular tax liability of $95,000, no tentative minimum tax and no other credits. What is its general business credit limitation?

Answer: $77,500. the credit may not exceed the excess of net income tax over the greater of the tentative minimum tax or 25 percent of so much of net regular tax liability as exceeds $25,000^TY2026 (IRC § 38(c)(1)) — the second limb takes a quarter of the excess of $95,000 over the statutory floor, a quarter of $70,000, or $17,500. Net income tax of $95,000 less the greater of nil and $17,500 leaves $77,500.

2. A business spends $60,000 removing architectural barriers. Its gross receipts last year were $850,000. What is the disabled access credit?

Answer: The statutory maximum. 50 percent of the eligible access expenditures for the taxable year that exceed $250 but do not exceed $10,250 — a maximum credit of $5,000^TY2026 (IRC § 44(a)) — half the expenditures within the band, and the band is narrow, so the credit is capped however much more is spent. a person whose gross receipts for the preceding taxable year did not exceed $1,000,000, or which employed not more than 30 full-time employees during that year, and which elects the section — an employee being full-time if employed at least 30 hours a week for 20 or more weeks in the year^TY2026 is satisfied on the gross receipts test.

3. A corporation cannot use $40,000 of general business credit this year. What happens to it?

Answer: a business credit carryback to the taxable year preceding the unused credit year, and a business credit carryforward to each of the 20 taxable years following it^TY2026 (IRC § 39(a)(1)) — it is carried back one year and then forward to each of the twenty following years, taken into account in the order the earliest arose under IRC § 39(a)(2). It is never refunded.

4. A company takes a $50,000 research credit. What happens to its deduction for the same research?

Answer: It is reduced by $50,000, unless the company elects a reduced credit under IRC § 280C(c)(2) and keeps the full deduction. domestic research or experimental expenditures otherwise deducted or charged to capital account are reduced by the amount of the IRC § 41(a) credit, unless the taxpayer elects a reduced credit instead^TY2026 — the default is the reduction, and the election must be made on a timely filed return.

5. Is the foreign tax credit part of the general business credit?

Answer: No. IRC § 901 is in subpart A, and IRC § 38(c)(1) computes net income tax after the credits allowable under subparts A and B. The foreign tax credit is therefore taken first and reduces the amount of tax against which the general business credit is measured.

Change log

2026-08-21Initial draft. Sets out the IRC § 38(a) structure and the IRC § 38(c)(1) limitation by reference to net income tax, the tentative minimum tax and a share of net regular tax liability above a floor, the IRC § 39(a)(1) one-year carryback and twenty-year carryforward, and three component credits — IRC § 44 disabled access, IRC § 41 research and IRC § 45R small employer health insurance. Records the IRC § 280C(c) rule that a research credit reduces the deduction for the same expenditure unless a reduced credit is elected, and that IRC § 280C(c)(1) now refers to IRC § 174A.