Many businesses take tax credits to reduce their tax bills. To report and calculate these business tax credits, you must complete an application form for each credit and add it to Internal Revenue Service (IRS) Form 3800, the general business tax credit report form.
Learn who can take business tax credits, and how to complete Form 3800 to recover them as part of your tax return.
- Businesses can use Internal Revenue Service (IRS) Form 3800 to claim business tax credits.
- You can also use Form 3800 to take tax carryovers from one year to past or future years.
- To claim a tax credit for a specific activity, you must first complete the form for that activity, then add it to Form 3800.
- The total tax credits you can claim for a year, including carryovers between tax years, is limited based on the amount you owe in taxes for the year.
What Is Form 3800?
IRS Form 3800 is used to record certain tax credits to reduce taxes for the year. Tax credits allow a business to reduce the tax owed on a dollar-for-dollar basis, or increase their tax refund. Tax credits are often set up to give incentives to businesses for certain activities. For example, there’s a business tax credit for increasing research activities, and another for making improvements to a building to give access to disabled customers and employees.
Check the IRS business tax credits site for a list of current credits for which you may be eligible.
Who Needs To Fill Out IRS Form 3800?
You must file Form 3800 if you have business tax credits to claim. To receive tax credits for business activities, you must first engage in an activity—e.g., transactions, investments, production of income—and be able to prove your eligibility for the credit by showing what you spent or the results.
For example, if you want a work opportunity tax credit for hiring employees in targeted areas, you must complete Form 5884 showing wages paid to qualified employees for a certain amount of work during the first year of employment. You then add information from each form to Form 3800.
Some businesses may be able to obtain eligible small business tax credit status if they are private companies, meaning either a corporation, partnership, limited liability company (LLC), or sole proprietorship, with average gross business receipts for the past three years of less than $50 million.1
You may be able to use this tax status to offset the alternative minimum tax for certain tax credits.
Limits on Tax Credits
There is a limit to how much you can take in business tax credits during any one year, based on your tax liability (the amount of taxes you must pay for the year).
The credits are applied in a specific order up to this limit. First, any credits carried forward to the current year from a past year are applied, followed by the general business credit earned during the year, and finally, any credits carried back to that year. See the Instructions for Form 3800 (page 2) for the specific order.
Some businesses with passive activities may also be limited in the amount of tax credits they can claim in a year. A passive activity is a trade or business in which you didn’t materially (substantially) contribute. One common example of a passive activity is renting real estate.
Tax Carryovers of Unused Tax Credits
If the tax credits you applied for in a year are greater than the maximum allowable, you may be able to use Form 3800 to carry forward unused tax credits to future years, or to carry back tax credits to past years, up to the maximum for that year. You can add them into Part I of the form.
Before You Start Working on Form 3800
You must first calculate your tax liability (the amount of tax you owe for the year) to determine how much you can take as tax credits, including amounts carried back from previous years (tax carrybacks) or carried forward (carryforwards). You may be able to use the IRS estimated tax worksheet in Publication 505 (page 34) to get an estimate of your tax owed, but it’s best to use a licensed tax preparer or business tax software.
You also need to calculate your alternative minimum tax, which applies to higher-income taxpayers who may benefit from favorable treatment for certain types of income. Include the calculation of your alternative minimum tax on Form 3800 even if you think your income isn’t high enough to be affected by this tax provision.
Fill out the correct form (called a “source form”) for each tax credit you want to take. For the work opportunity tax credit, for example, this would be Form 5884.
Steps To Complete Form 3800
To make sure the information on Form 3800 is accurate and complete, follow the steps set out by the IRS.
Complete Part III General Business Credits or Eligible Business Credits (page 3 of the form) before you complete Parts I and II.
Step 1: Calculating and Consolidating Tax Credit on Part III
- Select the category for the type of credit you want to claim and check the correct box. Separate out those credits that can qualify as an Eligible Small Business.
- Complete a separate Part III for each type of credit or carryback. For example, if your credit is a General Business Credit from a Non-Passive Activity, check Box A and describe the credit. Follow the same process if you have any General Business Credit carryforwards (Box C), General Business Credit carrybacks (Box D), and Eligible Small Business carryforwards (Box G).
- If you have a credit from more than one source, and one of the sources is a pass-through entity, you will need a separate Part III for each pass-through entity from which you received the same credit. Sole proprietorships, partnerships, LLCs, and S corporations are considered pass-through entities because the income from the business is passed through to the individual owner on their personal tax return.
- If you have more than one Part III box checked (more than one type of credit or source), including carryforwards and carrybacks, check box 1, and consolidate amounts from all Parts III.
- Column (b) is for entering the employer ID number (EIN) of a pass-through entity, and column (c) is for entering the amount.2
Step 2: Calculating the Current Year Credit and Allowable Credit
- Part I requires information about passive activities and any tax carryovers you want to take, using information from Part III. If your business has passive activities (as described above), you’ll need to enter information to see if your tax credits may be limited. This section also looks at carryforwards from previous years to the current tax year to calculate any limits.
- In addition to completing this section, you must also attach a required statement with information about tax credits and carryovers you want to take.
- Part II calculates the amount of your total allowable credit for the year based on information from Part I. This is the section where you enter your calculations for your taxable liability (before credits), your alternative minimum tax calculation, and any foreign tax credits. The amount on line 38 is the total amount of the tax credits you can take for the year. This amount goes on your tax return.3