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Hidden Gems of the Tax World: Reviewing Tax Credit Basics with Your Clients

Every year countless taxpayers overlook money-saving opportunities in the form of tax credits. This provides tax professionals with an opportunity to look like magicians as we whip money-saving strategies out of our proverbial hats in the form of readily available credits that our clients may have never heard about. Taxpayers also may be unaware of the rules surrounding tax credits—for instance, that if they learn after the fact they were eligible for a tax credit, they may still be able to claim it by submitting an amended tax return.  

Currently, in the US, there are over 1200 different credits available, ready to provide that dollar-for-dollar reduction to your tax bill. Through training to become a Certified Tax Planner, you can increase your knowledge of current tax credits and stay up-to-date with ongoing webinars and materials. Read on for an overview of the types of tax credits that will help you prepare to discuss options with your clients. 

The Origins of Tax Credits

First, taxpayers may not understand how a tax credit differs from a deduction. Their focus may have historically been on finding ways to reduce their taxable business income through deductions rather than seeking a direct reduction of their tax bill through credits. Start with the basics: Why do tax credits exist at all? Does the government simply have money burning a hole in its pocket that needs to be given away every April? Tax credits are strategic—they are created to incentivize specific behavior, especially among corporations. So taxpayers can view this as a mutually beneficial opportunity for their business and toward our government’s large-scale goals. Other credits may focus on influencing individual behavior as well. For instance, a tax benefit we’ll discuss in our next article incentivizes employees to save for retirement and encourages employers to provide retirement benefits. 

A great example is the federal research and development (R&D) tax credit. The IRS offers this credit to encourage companies to invest in innovation, expansion, and job creation. The expenses that can qualify for this credit are fairly broad, including the design, development, or improvement of products, processes, techniques, formulas, or software. By familiarizing themselves with the parameters for this credit, companies across a spectrum of industries may be surprised to find that they qualify!

Taxpayers sometimes also make the mistake of focusing mostly on federal tax credits and overlooking state and other local benefits. Many states actually have their own version of an R&D credit. In order to incentivize businesses to come to their region, a state or city may even offer tax credits that the federal government does not. 

Refundable vs. Nonrefundable Tax Credits

Throughout the COVID-19 era, the concept of refundable vs. nonrefundable tax credits was appearing more often in news updates and making its way into taxpayer conversations. This is another key distinction to help taxpayers understand just how beneficial tax credits can be. Refundable credits can actually result in cash in the taxpayer’s pocket, since the benefit is not limited to the taxes you owe. If a taxpayer qualifies for a refundable credit of $2,500 but their tax liability that year is only $2,000, they are entitled to a $500 check to make up the difference. This also explains the circumstances behind the highly-circulated news story—how Amazon ended up with a negative tax liability of $129 million in 2019. 

Taxpayers may also not be aware of some of the caveats that can make nonrefundable tax credits just as lucrative. For example, some nonrefundable tax credits may have a “carryforward” provision. If a business is not able to use the full amount they qualify for, they would then be allowed to apply the remainder of the credit to a future tax year. This may happen when the IRS limits how much can be claimed in a single year or when a business’ tax liability happens to be lower than usual that year.

If a tax credit is nonrefundable but there is no carryforward provision, taxpayers should not assume they will simply lose out on the “unused” portion of a tax credit. This is where you can add immense value as a tax professional: creating a tax plan can be the difference between realizing all possible tax credits and leaving money on the table. With advance planning, you can apply a strategy such as a Roth IRA conversion to make the most of a nonrefundable credit. The taxpayer could shift their retirement funds to a Roth IRA, pay taxes on those funds upfront, and then use the tax credit to cover the tax bill. This is the type of maneuver that will make clients overjoyed that they enlisted the help of a professional!

Statutory vs. Discretionary Tax Credits

Another important distinction is between statutory or discretionary (or non-statutory) tax credits. Taxpayers are more likely to be familiar with statutory credits—those that are defined by the law and made available to all qualifying businesses. The process is straightforward: if the business meets the legal criteria, they can claim the benefit. These credits come into existence when a new law is passed, but if that law changes or expires, the credit may disappear completely, so factoring deadlines and possible renewals into a tax plan is key. 

Taxpayers are less likely to be familiar with discretionary credits. These are evaluated on a facts and circumstances basis. Rather than checking the boxes on a list of qualifications and submitting a claim, the taxpayer will typically need to go through an application process and build a narrative to explain how their business fits the requirements. This can be compared to a grant that a nonprofit might apply for or a scholarship that a student might seek out. The proposal narrative of a grant application or the personal essay for a scholarship tells a story that demonstrates why that organization or person should be awarded the funding. Discretionary tax credits often operate in a similar way. While statutory tax credits are government funded, discretionary credits may have other funders, such as community leadership, special divisions of large corporations, or other government agencies. 

Claiming Tax Credits

Each tax credit will have its own unique set of rules that determine how to go about claiming it and the amount a certain taxpayer can receive. If taxpayers have seen claims on the internet (from ERC mills, for example) that promise the highest possible benefit, you may need to have a conversation about the specific limits for that credit. Some credits offer a fixed amount of money, while others are calculated as a percentage or a certain dollar amount up to a limit. For example, an R&D credit might amount to a percentage of a company’s research-and-development-related expenditures, not to exceed $250,000. 

Different tax credits will also require different levels of documentation. Taxpayers may not qualify unless they can document certain processes or generate certain results. Other credits may include a “clawback” or “recapture” provision, which essentially means that the company must continue to meet certain requirements in the future or even deliver on a set of public benefits, otherwise they must pay back that money. If a taxpayer claims a credit with this kind of clause and fails to meet the continuing requirements, they will likely get hit with penalties. 


Tax credits are like the hidden gems of the tax planning world—for those who know how to navigate them. Taxpayers will first need to be oriented to any steps they need to take to qualify and any restrictions that may exist for claiming them. This process will make the value of creating a proactive tax plan abundantly clear!

For further training on current tax credits and how to incorporate them into a tax plan, start the process of becoming a Certified Tax Planner today.

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