Business Tax Preparation · Business expenses, deductions and credits

General business credits

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^TY2026Verified 2026-08-21IRC § 38(a), opened at law.cornell.edu/uscode/text/26/38 (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^TY2026Verified 2026-08-21IRC § 38(c)(1), opened at law.cornell.edu/uscode/text/26/38 (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^TY2026Verified 2026-08-21IRC § 39(a)(1), opened at law.cornell.edu/uscode/text/26/39 (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^TY2026Verified 2026-08-21IRC § 44(a), opened at law.cornell.edu/uscode/text/26/44 (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^TY2026Verified 2026-08-21IRC § 44(b), opened at law.cornell.edu/uscode/text/26/44 (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^TY2026Verified 2026-08-21IRC § 41(a), opened at law.cornell.edu/uscode/text/26/41 (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^TY2026Verified 2026-08-21IRC § 280C(c)(1) and (c)(2), opened at law.cornell.edu/uscode/text/26/280C (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^TY2026Verified 2026-08-21IRC § 45R(b), opened at law.cornell.edu/uscode/text/26/45R (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^TY2026Verified 2026-08-21IRC § 45R(d)(1), opened at law.cornell.edu/uscode/text/26/45R (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

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^TY2026Verified 2026-08-21IRC § 38(c)(1), opened at law.cornell.edu/uscode/text/26/38 (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^TY2026Verified 2026-08-21IRC § 39(a)(1), opened at law.cornell.edu/uscode/text/26/39 (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^TY2026Verified 2026-08-21IRC § 44(a), opened at law.cornell.edu/uscode/text/26/44 (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^TY2026Verified 2026-08-21IRC § 44(b), opened at law.cornell.edu/uscode/text/26/44 (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^TY2026Verified 2026-08-21IRC § 280C(c)(1) and (c)(2), opened at law.cornell.edu/uscode/text/26/280C (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^TY2026Verified 2026-08-21IRC § 45R(d)(1), opened at law.cornell.edu/uscode/text/26/45R (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.

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^TY2026Verified 2026-08-21IRC § 38(c)(1), opened at law.cornell.edu/uscode/text/26/38 (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^TY2026Verified 2026-08-21IRC § 44(a), opened at law.cornell.edu/uscode/text/26/44 (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^TY2026Verified 2026-08-21IRC § 44(b), opened at law.cornell.edu/uscode/text/26/44 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^TY2026Verified 2026-08-21IRC § 39(a)(1), opened at law.cornell.edu/uscode/text/26/39 (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^TY2026Verified 2026-08-21IRC § 280C(c)(1) and (c)(2), opened at law.cornell.edu/uscode/text/26/280C — 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.