 Hello and welcome to this session in which we will discuss the general business credit. Now when we say general business credit is in contrast to personal credits. We do have personal credits and the purpose of the credit is just a quick reminder to do what? To help the government incentivize certain behavior either by individual or by businesses. How do you do so? You give them credit. What is a credit? A reduction in your tax bill. Now for the general business credit there's no one thing that's called the general business credit. A general business credit is a bunch. It's a variety of incentives to businesses to promote certain activities that are considered beneficial to the economy. So when we say general business credit you would say okay which one? Why? Because for the general business credit we could have a bunch of them and all of them combined are called the general business credit. For example you could have a credit called research and development credit. Why? You want to encourage. The government wants to encourage you to conduct research and development. It's good for the economy. So what do they do? How do they do this? They incentivize you. They say if you conduct research and development we'll give you a tax credit. We could have a work opportunity tax credit. We could have a low income housing tax credit, rehabilitation expenditure credit and much much more. So all these credits together when we combine them together they amount to the general business tax credit. Now before we proceed any further I have a public announcement about my company farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead start your free trial today. What do we need to know about the general business tax credit? The general business tax credit is limited. It has a limitation so you might have a lot of credit but you cannot claim them. So it's going to be limited to the net income tax. Whatever your tax is reduced it's going to be reduced. It's going to be limited up to that but it's going to be reduced by your tentative minimum tax or AMT and this number for our purposes will be given to you or 25% of net regular tax liability that exceed 25,000. Don't worry we're going to work an example but basically what you're looking at is this. You would say this is my income tax this number here then I'm going to deduct reduced by the greater of these two either AMT or 25% of net regular tax liability. Now when we say net regular tax liability what do we mean by net regular tax liability? It's your regular tax liability which is usually it's this one net income tax reduced by certain non refundable credits like a child credit for child and dependent care credit foreign tax credit which are personal non refundable tax credit. Most of the time those figures will be given to you but if you need but in case you need to know what's the difference between net regular and the net income tax well the net regular tax liability is reduced by certain non refundable credits. Now the best way to illustrate this is to take a look at an example let's assume Adam the general business tax credit for the first year they have 90,000 that's how much credits they have so they add up all their credits from various activities research work opportunity investment energy saving credit all of it amounted to 90,000. Now can Adam take the full 90,000 as a general business tax credit? No that credit is limited let's take a look at what we are giving his net income tax is 200,000 the tentative minimum tax is 185 and the net regular tax liability is 190 well the question is how much can Adam claim as a credit remember Adam has 90,000 how much of that 90,000 he can claim well we're going to start with the net income tax the net income tax is 200,000 which is given to you then we're going to deduct this by the greater of two numbers one is amt which is tentative minimum tax 185,000 or net net regular tax liability so the net regular tax liability is 190,000 that's also given we reduce it by 25,000 just this number is given then we multiply this by 25% so we'll take the the net regular tax liability reduce it by 25 multiply by 25% we're gonna we're gonna get 41,250 well 200,000 minus the greater of these two the greater of these two is 185 therefore the greater of these two is 185 what we can claim is 15,000 so of the 90,000 of various general business credit that Adam accumulated this period Adam can only can only use 15,000 well what's left is 75,000 what's going to happen to that 75,000 of general business tax credit that Adam accumulated this year well any general business tax credit that's unused you can either take it back one year so general business tax credit that's initially not used can be can be carried back for one tax year you can go back amend your return for the prior year and as a result you could obtain a refund from the prior year go back prior year what happened if you don't have a prior year you don't have a tax bill well do you lose it not at all any leftover of unused credit is carried for a maximum of 20 years so you can carry it 20 years and the way you carry it is on a FIFO approach first in first out approach and why what's the reason by by prioritizing the use of older credit so basically you will go back always use the older the FIFO method help reduce the likelihood of losing the credit because what's happening is you're going early on and using those credits so because those credit the the the latest the the earliest are expired first therefore they want you to use them first so this way they don't expire that's why you would use FIFO first in first out and the best way to illustrate this is to work an example that's going to show you this how the unused business tax credit works using FIFO let's assume Adam company has the following business credit carryovers for a from year x3 he got 6000 year x4 17000 year x5 5000 year x6 18000 so those are carryover every year Adam will have some extra business credit and Adam has been carrying these over this year Adam has 31 000 in business tax credit so basically you will add this to so x7 they got an additional 31 000 however the total credit allowed during the current year is 65 000 now Adam has allowable credit he can now take those credit he can take up to 65 000 based on the computation remember when you have to figure out how much allowable credit can we take it happens to be 65 now how do we use the amount of general business tax credit how do we how do we utilize the old ones against the 65 okay and if there's anything remaining yes we can we can use the old ones how we're going to go back and start with 60 we're going to use the 6000 we're going to use the 17 we're going to use the 15 we're going to use the 18 and that's going to all add up to 46 000 so we're going to take the 65 000 and use up the 46 basically those are used up and what remain is 19 000 great now we still have for this year 31 000 we're going to take the 31 000 and reduce the use up the 19 000 that we have and we're going to be end up with 12 000 of unused credit so we're going to now end up 12 000 and then use credit so basically all of these are gone now going forward 20 x 7 atom company will have 12 000 of unused credit then we're going to figure out what's going to happen in 20 x 8 whether we're going to use them up or have more carry over depending on the allowable credit that we can take during x 8 x 9 so on and so forth so this is how it works for the general business tax credit the unused business tax credit what should you do now go to far hat lectures and look at additional mcqs through false additional lectures that's going to help you understand the business tax credit we're going to have several recording about the business tax credit illustrating the various business tax credits we're going to have a lot of them i may select four five six of them just going to give you an idea the common one that you could see in your accounting class you could see on the cpa exam you could see on the enrolled agent exam and the reason why we teach business tax credit in an individual tax course because you can be self-employed and have those business credit because self-employed individuals are businesses and as a business you do qualify for those business credit invest in yourself study hard accounting is worth it and stay safe