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What Are Business Tax Credits? Business tax credits are amounts businesses can take off the taxes they owe to the government. Instead of a deduction, which lowers taxable income, business tax credits reduce the taxes that need to be paid. The tax credits are used when a business files its annual tax return. In the U.S., the Internal Revenue Service (IRS) ensures that business tax credits are used to pay off a company's debt to the federal government. How to Understand Tax Credits for Businesses The business tax credit is a general term for tax credits meant to encourage a specific business activity. There are many kinds of business tax credits, but some of the most common ones are hiring people who have trouble getting jobs, investing in research, making a building more energy efficient, and so on. If there is a business tax credit for something, the government wants to reward and promote that thing. Business tax credits are aimed, while allowable deductions are not. This is because they give businesses more chances to save money on taxes, which means that the government gets less money from taxes. Therefore, at tax time, a business should use all the credits it can get to lower the amount of money it owes the federal government. In addition to helping businesses save money on taxes in the current filing year, business tax credits can often be used on past and future returns. For example, if a business has used up all of its tax credits for the current tax year but not for the year before, it may be able to apply those credits to tax returns it has already filed. In the same way, if they have more credits than they can use in the current tax year, they can carry the rest of those credits into the next tax year. We call this a carryforward. Governments don't use business tax credits as often as possible because they are a strong incentive. People often mix them up with the more well-known business tax deductions because of this. The main difference between a business tax credit and a business tax deduction is that a tax deduction is used to lower the taxable income. In contrast, a tax credit directly lowers the amount of tax that needs to be paid. For example, a $5,000 tax deduction for a business will only save the business a portion of that $5,000. If a company's tax rate is 20%, the $5,000 deduction only saves it $1,000 in taxes. If, on the other hand, the company is eligible for a $5,000 tax credit, it gets the total $5,000 back in lower taxes.