Corporate – Tax credits and incentives

Corporate tax credits and incentives are pivotal tools employed by the U.S. government to stimulate economic growth, encourage innovation, and promote sustainable practices. As we navigate through 2025, these incentives are undergoing significant transformations, influenced by legislative changes and evolving economic priorities.

🏛️ Overview of Corporate Tax Credits and Incentives

Corporate tax credits directly reduce a company’s tax liability on a dollar-for-dollar basis, while incentives may include deductions, exemptions, or other financial benefits. These mechanisms are designed to encourage businesses to engage in activities that align with national economic and social goals.

🔧 Key Federal Tax Credits and Incentives

1. Research & Development (R&D) Tax Credit

The R&D tax credit incentivizes companies to invest in innovation by offsetting costs associated with research activities. Eligible expenses include wages for research personnel, costs of materials, and certain overhead expenses. This credit is crucial for industries such as technology, pharmaceuticals, and manufacturing.

2. Investment Tax Credit (ITC)

The ITC allows businesses to deduct a percentage of investment costs in renewable energy properties, such as solar panels and wind turbines. This credit has been instrumental in promoting clean energy adoption across various sectors.

3. Production Tax Credit (PTC)

The PTC provides a per-kilowatt-hour tax credit for electricity generated by qualified energy resources. It supports the development of renewable energy projects by improving their financial viability.

4. Work Opportunity Tax Credit (WOTC)

The WOTC encourages employers to hire individuals from targeted groups facing significant barriers to employment. Employers can claim a credit equal to a percentage of the first-year wages paid to these employees.

🌱 Clean Energy Incentives Under the Inflation Reduction Act (IRA)

The IRA, enacted in 2022, introduced a suite of clean energy tax incentives aimed at reducing greenhouse gas emissions and promoting sustainable practices. Key provisions include:

• Enhanced ITC and PTC: Increased credit amounts for renewable energy projects, with additional bonuses for projects meeting certain labor and domestic content requirements.
• Clean Hydrogen Production Credit: Incentivizes the production of clean hydrogen, a critical component in decarbonizing various industries.
• Advanced Manufacturing Production Credit: Supports domestic manufacturing of clean energy components, such as solar panels and batteries.
• Carbon Capture Credit: Provides credits for facilities that capture and store carbon dioxide emissions.

These incentives are designed to be accessible to a broad range of taxpayers, including tax-exempt entities, through mechanisms like direct pay and credit transferability.

🏛️ Legislative Developments in 2025

In 2025, significant legislative activity is reshaping the landscape of corporate tax credits and incentives:

House Republican Tax Bill

The House of Representatives, under Republican control, passed a comprehensive tax bill that proposes:

• Repeal or Reduction of Clean Energy Credits: The bill aims to eliminate or phase out several clean energy tax incentives established under the IRA, including those for electric vehicles, solar energy, and energy-efficient buildings.
• Introduction of New Business Incentives: Provisions to enhance deductions for capital investments and research expenditures are included to stimulate economic growth.

These changes have sparked debate, with proponents arguing for fiscal responsibility and critics warning of setbacks in climate goals and clean energy investment.

🏢 State and Local Incentives

Beyond federal programs, state and local governments offer various incentives to attract and retain businesses:

• Tax Abatements: Temporary reductions or eliminations of property taxes to encourage investment in specific areas.
• Grants and Subsidies: Financial assistance for businesses undertaking projects that create jobs or promote economic development.
• Training Programs: Support for workforce development through subsidized training initiatives.

These incentives vary widely by jurisdiction and are often tailored to the economic priorities of the region.

📊 Strategic Considerations for Businesses

Given the dynamic nature of tax legislation, businesses should:

• Stay Informed: Regularly monitor legislative developments at both federal and state levels.
• Engage Tax Professionals: Consult with tax advisors to navigate complex incentive programs and ensure compliance.
• Evaluate Investment Decisions: Consider the availability and longevity of tax incentives when planning capital investments.
• Advocate for Policy: Participate in industry groups to influence policy decisions that affect business operations.

The United States offers a diverse array of corporate tax credits and incentives designed to encourage specific economic activities, promote innovation, stimulate investment, and achieve various policy objectives such as job creation, clean energy adoption, and community development.¹ These incentives can significantly reduce a company’s tax liability and enhance its financial performance.²

It’s crucial for businesses to understand that tax credits offer a dollar-for-dollar reduction in tax liability, making them generally more valuable than deductions, which only reduce taxable income.³ Corporate tax credits can be either non-refundable (can reduce tax liability to zero but no lower) or refundable (can result in a refund even if no tax is owed).⁴

Here’s a detailed look at some of the most prominent corporate tax credits and incentives in the U.S.:

1. Research and Development (R&D) Tax Credit (IRC Section 41)

The R&D tax credit is one of the most widely used and significant corporate tax incentives in the U.S. It aims to encourage companies to innovate and invest in technological advancement within the country.⁵

• What it is: A dollar-for-dollar reduction in tax liability for qualified research expenditures (QREs).
• Permanence: Made a permanent provision of the Internal Revenue Code by the Protecting Americans from Tax Hikes (PATH) Act of 2015.⁶
• Qualifying Activities: To qualify, R&D activities must meet a “four-part test”:⁷
  1. Section 174 Test: The expenditures must be eligible for a Section 174 deduction, meaning they are research and development costs in the experimental or laboratory sense.⁸
  2. Technological Information Test: The research must aim to discover information that is technological in nature, intended for the development of a new or improved business component (product, process, software, technique, formula, or invention).⁹
  3. Process of Experimentation Test: The activities must involve a process of experimentation, which means evaluating alternatives or employing a systematic trial-and-error approach to overcome technological uncertainties.¹⁰
  4. Business Component Test: The tests must be applied to each business component (product, process, etc.). The “shrinking back” rule allows for testing at the most significant subset of elements if the entire product doesn’t qualify.¹¹
• Qualifying Expenditures (QREs):
  • Wages for employees performing qualified services (direct research, direct supervision, direct support).
  • Cost of supplies used in the research process.
  • Amounts paid for computer use (e.g., cloud computing services related to development operations).¹²
  • 65% of amounts paid to contract researchers (third parties).¹³
• Calculation Methods: Companies can choose between two methods:
  • Regular Credit (RC) Method: Based on historical R&D expenditures relative to current QREs.
  • Alternative Simplified Credit (ASC) Method: A more streamlined approach, often preferred by companies with fluctuating R&D spending.¹⁴
• Small Business and Start-up Provisions: The PATH Act also expanded the credit’s scope:¹⁵
  • Offsetting AMT: Eligible small businesses can use the R&D credit to offset their Alternative Minimum Tax (AMT) liability.¹⁶
  • Payroll Tax Offset: Qualified small businesses (less than $5 million in gross receipts for the current year and no more than five years of gross receipts) can elect to use up to $250,000 of the credit against their payroll tax liability, rather than income tax.¹⁷ This is particularly beneficial for startups that may not yet have income tax liability.
• Retroactive Claims: Businesses can typically claim the R&D credit retroactively by filing amended returns for any open tax years (generally three years).¹⁸
• Interaction with Section 174 Amortization: While the R&D credit is beneficial, a significant change under the TCJA (effective for tax years beginning after December 31, 2021) requires companies to capitalize and amortize (deduct over time) their R&D expenses under IRC Section 174 over five years for domestic research and 15 years for foreign research, rather than immediately deducting them.¹⁹ This has created a cash flow challenge for many businesses and is a major point of discussion for potential legislative “fixes” to allow for immediate expensing again.

2. Clean Energy and Climate-Related Tax Credits (Driven by the Inflation Reduction Act – IRA)

The Inflation Reduction Act of 2022 (IRA) dramatically expanded and introduced numerous clean energy and climate-related tax credits, aiming to accelerate the transition to a clean energy economy, bolster domestic manufacturing, and reduce carbon emissions.²⁰ Many of these credits are transferable or allow for “direct pay” (refundable) to make them more accessible.²¹

• Investment Tax Credit (ITC) for Energy Property (IRC Section 48):
  • Provides a credit for investment in renewable energy properties like solar, fuel cells, geothermal, small wind, energy storage, biogas, and microgrid controllers.²²
  • Base Credit: Generally 6% of the qualified investment.
  • Increased Credit: Can be increased to 30% (5 times the base credit) if prevailing wage and apprenticeship requirements are met.
  • Bonus Credits: Additional percentage points can be earned for:
    • Domestic Content: Meeting certain domestic content requirements for steel, iron, and manufactured products (10 percentage points).
    • Energy Community: Located in an “energy community” (areas with historical reliance on fossil fuel industries or brownfield sites) (10 percentage points).²³
    • Low-Income Communities/Indian Land: Located in certain low-income communities or on Indian land.
  • Future Transition: For facilities placed in service after December 31, 2024, this credit transitions to the Clean Electricity Investment Credit (IRC Section 48E), which is a technology-neutral investment tax credit for clean electricity generation and energy storage.
• Production Tax Credit (PTC) for Electricity from Renewables (IRC Section 45):²⁴
  • Provides a credit per kilowatt-hour for electricity produced from eligible renewable sources (e.g., wind, biomass, geothermal, solar, hydropower).
  • Base Credit: Generally 0.3 cents per kilowatt-hour (adjusted for inflation).
  • Increased Credit: Can be 1.5 cents per kilowatt-hour if prevailing wage and apprenticeship requirements are met.
  • Future Transition: For facilities placed in service after December 31, 2024, this credit transitions to the Clean Electricity Production Credit (IRC Section 45Y), a technology-neutral production tax credit.²⁵
• Carbon Oxide Sequestration Credit (IRC Section 45Q):
  • Extended and enhanced by the IRA, this credit incentivizes carbon capture, utilization, and storage.
  • Credit Amount: Ranges from $12 to $36 per metric ton of captured carbon oxide, with higher rates ($60 to $180) if prevailing wage and apprenticeship requirements are met.²⁶ The amount depends on the method of sequestration (e.g., direct air capture, industrial capture, utilization).
• Advanced Manufacturing Production Credit (IRC Section 45X):
  • A new credit under the IRA for the domestic production of certain solar, wind, and battery components, and critical minerals.
  • Credit Amount: Varies by component type, designed to incentivize U.S. manufacturing across the clean energy supply chain.
• Clean Hydrogen Production Credit (IRC Section 45V):
  • A new credit for the production of clean hydrogen, with credit amounts varying based on the lifecycle greenhouse gas emissions rate.²⁷ Higher credits are available if prevailing wage and apprenticeship requirements are met.
• Commercial Clean Vehicle Credit (IRC Section 45W):
  • Provides a credit for businesses purchasing qualified commercial clean vehicles (e.g., electric or fuel cell vehicles).²⁸
  • Credit Amount: Up to $40,000, depending on the vehicle’s weight and propulsion type.
• Energy Efficient Commercial Buildings Deduction (IRC Section 179D):
  • Allows building owners and long-term lessees to deduct the cost of energy efficiency improvements to commercial buildings.
  • Deduction Amount: Can range from $0.50 to $5.00 per square foot, depending on the efficiency increase and whether prevailing wage and apprenticeship requirements are met.²⁹

3. Employment-Related Tax Credits

These credits encourage employers to hire individuals from specific targeted groups or to provide certain benefits.³⁰

• Work Opportunity Tax Credit (WOTC):
  • What it is: A federal tax credit available to employers for hiring and employing individuals from certain targeted groups who have faced significant barriers to employment.³¹³²
  • Extension: Authorized through December 31, 2025.
  • Credit Amount: Generally 25% or 40% of the first $6,000 of wages paid to a qualified employee, for a maximum of $2,400.³³ Higher limits apply for certain qualified veterans.
  • Targeted Groups: Includes qualified veterans, ex-felons, recipients of certain public assistance, vocational rehabilitation referrals, and residents of Empowerment Zones, among others.³⁴
  • Process: Employers must apply for and receive certification from a designated local agency that the new hire is a member of a targeted group before the individual begins work.
• Employer-Provided Child Care Credit (IRC Section 45F):
  • Provides a credit for businesses that incur qualified child care expenditures, such as operating a child care facility for employees or providing child care resource and referral services.
  • Credit Amount: Up to 25% of qualified child care facility expenditures and 10% of qualified child care resource and referral expenditures, with a maximum credit of $150,000 per year.
• Indian Employment Credit (IRC Section 45A):
  • Incentivizes businesses to hire and retain Native American employees who work and live on or near an Indian reservation.
  • Credit Amount: Generally 20% of the excess of qualified wages and qualified employee health insurance costs paid to such employees over the amount paid in 1993.
• Disabled Access Credit (IRC Section 44):
  • Helps small businesses with the cost of making their businesses accessible to individuals with disabilities.
  • Credit Amount: 50% of eligible access expenditures that exceed $250 but do not exceed $10,250, up to a maximum credit of $5,000.³⁵
• Employee Retention Credit (ERC) – Note on Moratorium:
  • While historically a significant COVID-19 relief measure, the IRS has imposed a moratorium on processing new ERC claims since September 2023 due to a high volume of fraudulent claims. Businesses should exercise extreme caution and seek professional advice before pursuing this credit.

4. Investment-Related Tax Credits and Incentives

These incentives encourage capital investment in specific areas.³⁶

• Historic Rehabilitation Tax Credit (IRC Section 47):
  • Encourages the rehabilitation of historic buildings.
  • Credit Amount: 20% of qualified rehabilitation expenditures for certified historic structures.³⁷
  • Usage: Can be used over five years and excess credits can be carried back one year and forward 20 years.
• Low-Income Housing Tax Credit (LIHTC) (IRC Section 42):
  • The largest federal program for encouraging the development of affordable housing.
  • What it is: Provides a tax credit for investors in qualified affordable rental housing projects.
  • Credit Amount: Generally 9% (for new construction/substantial rehab not federally subsidized) or 4% (for existing buildings/federally subsidized new construction) of eligible basis annually for 10 years.
• New Markets Tax Credit (NMTC) (IRC Section 45D):
  • Aims to stimulate investment and economic development in low-income communities.
  • What it is: Provides investors with a tax credit for making equity investments in certified Community Development Entities (CDEs), which then use the capital to provide financial products and services to businesses in low-income communities.³⁸
  • Credit Amount: Investors receive a 39% federal tax credit (taken over seven years) on the amount of their investment.
• Bonus Depreciation (IRC Section 168(k)):
  • While not a credit, bonus depreciation is a significant incentive for business investment.³⁹
  • What it is: Allows businesses to immediately deduct a large percentage of the cost of eligible new or used qualified property placed in service during the year, rather than depreciating it over many years.
  • Phasing Down: The bonus depreciation rate was 100% for property placed in service before January 1, 2023. It began phasing down by 20% each year, dropping to 80% for 2023, 60% for 2024, 40% for 2025, 20% for 2026, and 0% for 2027 and later years. There is ongoing legislative debate about extending full expensing.
• Section 179 Expensing:
  • Allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased⁴⁰ or financed during the tax year, up to certain limits.
  • Annual Limits: For 2024, the maximum Section 179 deduction is $1.22 million, with a phase-out threshold starting at $3.05 million.

5. Industry-Specific and Other Incentives

• Manufacturing Incentives: Beyond the R&D credit and bonus depreciation, many states offer specific incentives for manufacturing, including property tax abatements, sales and use tax exemptions on manufacturing equipment, and job creation credits. The Advanced Manufacturing Production Credit (45X) under the IRA is a key federal incentive for certain clean energy manufacturing.⁴¹
• Foreign Tax Credit (IRC Section 901):
  • While not a traditional incentive, this credit prevents double taxation for U.S. corporations that earn income abroad and pay taxes to foreign governments. It allows companies to offset their U.S. tax liability by the amount of income taxes paid to foreign countries.
• Opportunity Zones:
  • Allows investors to defer or potentially eliminate capital gains taxes by investing in Qualified Opportunity Funds (QOFs) that are designed to spur economic development and job creation in distressed communities.⁴²

Navigating Corporate Tax Credits and Incentives

To effectively leverage these complex incentives, corporations should:

1. Proactive Planning: Integrate tax credit and incentive planning into overall business and financial strategies.⁴³
2. Eligibility Assessment: Thoroughly evaluate activities and investments against the specific criteria for each credit.
3. Documentation: Maintain meticulous records to substantiate claims, as tax credits are frequently scrutinized during audits.⁴⁴
4. Professional Expertise: Engage tax professionals with specialized knowledge in corporate tax credits and incentives. This is particularly important for complex credits like R&D, clean energy, and international provisions, which often require technical analysis and detailed documentation.
5. State and Local Incentives: Don’t overlook the significant tax credits and incentives offered by state and local governments, which can often be more generous than federal programs for specific activities (e.g., job creation, capital investment, or locating in certain development zones).

The landscape of corporate tax credits and incentives is dynamic, with ongoing legislative debates and evolving IRS guidance. Staying informed and strategic is crucial for businesses to maximize these valuable tax-saving opportunities.