Study Unit 8: Credits, Losses, and Additional Taxes

The General Business Credit cannot lower your tax below

• The poverty level for the year.

  
  

• The taxpayer’s tax for the prior year.

  
  

• A number IRS announces each year.

  
  

• 25% of net regular tax over $25,000.

  
  

Answer explanation

The General Business Credit (GBC) is limited to the greater of the tentative alternative minimum tax or net income tax minus 25% of net regular tax over $25,000. The amount that may be claimed as the GBC is limited based on tax liability. A credit cannot lower a taxpayer’s liability below zero.

The General Business Credit consists of the following credits EXCEPT

• Investment Credit.

  
  

• Pension Plan Start-Up Cost Credit.

  
  

• Work Opportunity Credit.

  
  

• Adoption credit.

  
  

Answer explanation

The General Business Credit (GBC) is a set of several credits commonly available to businesses. The GBC includes credits for investment, research, work opportunity, disabled access, pension plan start-up, and childcare facilities. It does not include a credit for adoptions. The adoption credit is for individuals, not businesses.

A company increased its research expenses by $3,600. What is the maximum credit it qualifies for on its tax return for tax year 2023?

• $360

  
  

• $900

  
  

• $2,700

  
  

• $720

  
  

Answer explanation

Publication 334 states, “The research credit is designed to encourage businesses to increase the amounts they spend on research and experimental activities. The credit is generally 20% of the amount by which your research expenses for the year exceed your base amount.”

The Barrow and Jones partnership incurred qualified rehabilitation expenses of $50,000 on a certified historic structure. What is the Rehabilitation Investment Credit before tax limitations are applied?

• $5,000

  
  

• $10,000

  
  

• $7,500

  
  

• $6,000

  
  

Answer explanation

Instructions for Form 3468 state, “You are allowed a credit for qualified rehabilitation expenditures made for any qualified rehabilitated building.” The credit is 20% of the expenditures for a certified historic structure spread over 5 years.

An employee who qualifies for the Work Opportunity Credit must be a member of a targeted group. All of the following are considered targeted groups EXCEPT

• Qualified veterans.

  
  

• Qualified relatives of the employer.

  
  

• Qualified summer youth employees.

  
  

• Qualified SNAP recipients.

  
  

Answer explanation

IRS Form 5884 defines a member of a targeted group to be any employee who has been certified by a state employment security agency (SESA) as a

1. 1. Qualified IV-A recipient of temporary assistance to needy families

2. 2. Qualified veteran

3. 3. Qualified ex-felon

4. 4. Designated community resident

5. 5. Vocational rehabilitation referral

6. 6. Qualified supplemental nutrition assistance program (SNAP) benefits recipient

7. 7. Qualified SSI recipient

8. 8. Long-term family assistance recipient

9. 9. Qualified summer youth employee

10. 10. Qualified long-term unemployment recipient

The F&E Partnership spent $100,000 on eligible access expenditures that qualify for the Disabled Access Credit. The partnership had gross receipts of $1 million and 30 full-time employees during the preceding tax year. What is the amount of the Disabled Access Credit for the year 2023?

• $5,000

  
  

• $10,000

  
  

• $250

  
  

• $50,000

  
  

Answer explanation

Publication 535 states, “The disabled access credit is a nonrefundable tax credit for an eligible small business that pays or incurs expenses to provide access to persons who have disabilities.” Form 8826 defines, “For purposes of the credit, an eligible small business is any business or person that (a) had gross receipts for the preceding tax year that did not exceed $1 million or had no more than 30 full-time employees during the preceding tax year . . .” The credit equals 50% of eligible expenditures in excess of $250 and less than $10,250.

John has three employees who are certified as members of a targeted group. Two of the employees worked for John for 2 months in 2021 and came back to work for John on January 1, 2023. The other employee began working for John on January 1, 2023. Each employee makes $1,000 per month. How much can John claim as qualified first-year wages in computing the Work Opportunity Credit?

• $12,000

  
  

• $6,000

  
  

• $36,000

  
  

• $0

  
  

Answer explanation

The Work Opportunity Credit is 40% of the first $6,000 of wages paid to each member of a target group during the first year of employment. Because only one of the employees qualifies as a first-year employee, the wages used to calculate the credit equal $6,000.

Ryan runs a manufacturing business employing several people with young children. These employees require daycare as both parents work. He decided that, in order to make it easier for his employees to come to work each day, he would allocate some of the unused space in his manufacturing facility to a childcare facility. In 2023, he incurred $20,000 in qualified childcare facility expenditures. He had no qualified childcare resource and referral expenditures and had no pass-through credits. What is Ryan’s credit for 2023?

• $20,000

  
  

• $2,000

  
  

• $10,000

  
  

• $5,000

  
  

Answer explanation

The Employer-Provided Childcare Facilities Credit was established to create an incentive for small- and medium-sized businesses to provide childcare for their employees. This credit applies to 25% of qualified expenses paid for employee childcare. Thus, Ryan can use a credit of $5,000 ($20,000 × 25%).

Which one of the following statements about the Disabled Access Credit is false?

• The credit is available in the current year only to businesses having gross receipts that were $1 million or less or no more than 30 full-time employees in the preceding tax year.

  
  

• The credit equals 50% of eligible expenditures in excess of $250 and less than $10,250.

  
  

• No deduction is allowed for any amount for which the Disabled Access Credit is claimed.

  
  

• The credit is a refundable credit for individuals and corporations.

  
  

Answer explanation

Under Sec. 44(a), a credit is available to individuals and corporations that make expenditures to provide access to disabled individuals. The Disabled Access Credit is not a refundable credit because it is part of the General Business Credit. Excess general business credits may be carried back 1 year or forward 20 years, but not refunded.

In 2023, Santergraph, Inc., remodeled and converted a portion of its building into a licensed childcare facility open for the care of any of its employees’ children. The cost of this remodeling qualifies for which of the following?

• An asset to be depreciated over the remaining useful life of the building.

  
  

• An adjustment to income of 75% of the costs, with the balance depreciable.

  
  

• A tax credit of 25% of the qualified expenses, maximum credit of $150,000, with the balance depreciable.

  
  

• Section 179 expensing election.

  
  

Answer explanation

Employers may receive a 25% credit for childcare expenses up to a maximum credit of $150,000. The costs for Santergraph, Inc., to remodel and convert a portion of its building into a licensed childcare facility for the care of any of its employees’ children are qualified childcare expenses (Form 8882).