Individual and Business Tax Credits in 2026

A deduction reduces taxable income. A credit reduces tax dollar for dollar, which makes a $2,000 credit worth roughly three times a $2,000 deduction to a taxpayer in the 24% bracket. That is why credits attract both planning attention and examination attention.

The credit landscape changed more in the past year than in the decade before it. The One Big Beautiful Bill Act made several credits permanent, expanded others, and terminated the entire clean energy suite on a compressed schedule. Meanwhile California, whose conformity date is January 1, 2025 under Senate Bill 711, does not follow OBBBA at all — so a credit claimed federally frequently has no California counterpart.

This page is an overview of what exists now. We advise individuals and businesses on credit qualification, documentation, and examination defense in Temecula, Murrieta, San Diego, Riverside, and San Bernardino.

Refundable Versus Nonrefundable

The distinction determines whether a credit is worth anything to you.

A nonrefundable credit reduces tax to zero and stops. A taxpayer owing $800 who qualifies for a $2,000 nonrefundable credit gets $800 of benefit and loses the rest, unless the credit carries forward.

A refundable credit pays out beyond zero. A taxpayer owing nothing who qualifies for a $2,000 refundable credit receives $2,000.

Most credits are nonrefundable. The significant refundable ones for individuals are the Earned Income Tax Credit, the refundable portion of the Child Tax Credit, and 40% of the American Opportunity Tax Credit.

Individual Credits

Child and Family

The Child Tax Credit is $2,200 per qualifying child for 2026, with a refundable portion of $1,700, now permanent and inflation-indexed. The Credit for Other Dependents provides $500 for dependents who do not qualify, and the Child and Dependent Care Credit covers a portion of care expenses enabling work.

California adds credits with no federal equivalent, including the CalEITC and the Young Child Tax Credit for families with a child under six.

Education

The American Opportunity Tax Credit provides up to $2,500 per student for the first four years of postsecondary education, 40% of it refundable. The Lifetime Learning Credit provides up to $2,000 per return with no year limit but is entirely nonrefundable. They cannot both be claimed for the same student in the same year.

California offers no equivalent to either. See education tax credits.

Energy — Largely Gone

OBBBA terminated the clean energy credits on a staggered schedule. Residential credits under Sections 25C and 25D ended after December 31, 2025; clean vehicle credits under 25E, 30D, and 45W ended after September 30, 2025. Anyone still being told these are available is working from outdated material. See clean energy tax credits.

Business Credits

Research and Development

The Section 41 credit remains the most valuable ongoing business credit, and OBBBA restored immediate expensing of domestic research costs under new Section 174A. California runs a parallel but different credit — 15% regular or a newly available 3% Alternative Simplified Credit after Senate Bill 711, with the Alternative Incremental method repealed and the election binding on a timely filed original return. See the R&D credit.

Employment Credits

The Work Opportunity Tax Credit rewards hiring from targeted groups — veterans, long-term unemployment recipients, ex-felons, and others — but requires certification on Form 8850 within 28 days of the employee starting work. Miss that window and the credit is gone regardless of eligibility. This is the most common way employers lose a credit they actually earned.

The Employer Credit for Paid Family and Medical Leave, made permanent by OBBBA, applies to employers providing qualifying paid leave under a written policy.

Employee Retention Credit

New ERC claims have been under moratorium since September 2023, and OBBBA retroactively barred certain Q3 and Q4 2021 claims received after January 31, 2024 while extending the IRS audit window to six years. The live issue now is defending claims already filed. See ERC audit defense.

Other Business Credits

• Disabled Access Credit — for small businesses making facilities accessible
• Employer-Provided Childcare Credit — expanded by OBBBA
• Small Employer Pension Startup Credit — offsets the cost of establishing a retirement plan
• Small Business Health Care Credit — for qualifying employers providing coverage through the SHOP marketplace

Most business credits flow through the general business credit under Section 38, which limits the amount usable in a year and carries the excess back one year and forward twenty.

Where California Diverges

Because California’s conformity date precedes OBBBA, several federal benefits have no state counterpart:

• Section 199A QBI deduction — no California equivalent
• Bonus depreciation — never adopted
• Section 179 — $25,000 California cap against $2.5 million federally
• QSBS — no California exclusion
• Clean energy credits — California maintains its own separate programs rather than conforming to the federal regime

California also imposes a $5 million annual cap on business credit usage for 2024 through 2026, with disallowed amounts carrying forward indefinitely and an irrevocable Form 3870 election available to convert some into a refundable stream. A business with large California credits should model this cap rather than assume the credits are usable in the year earned.

Why Credits Draw Examinations

Credits are examined more heavily than deductions, for a straightforward reason: they cost the government more per dollar claimed, and several have been the subject of organized abuse.

Refundable credits get particular attention because they generate payments to taxpayers with no liability. The IRS applies due diligence requirements to preparers claiming the EITC, Child Tax Credit, AOTC, and head of household status, with penalties assessed against the preparer per failure.

Two enforcement consequences are worth knowing. A taxpayer whose credit claim is disallowed for reckless or intentional disregard can be banned from claiming that credit for two years, and ten years where the disallowance was for fraud. And after a disallowance, Form 8862 is generally required to claim the credit again in a later year.

The credits most associated with promoter-driven abuse — the ERC and, historically, aggressive R&D claims — carry the additional risk that a contingency-fee promoter disappears once the examination begins, leaving the taxpayer to defend a position they did not develop and cannot document. Our IRS audit page covers examination defense.

Ordering and Limitation Rules

Qualifying for a credit and being able to use it are separate questions, and the second one defeats more claims than the first.

Nonrefundable credits are applied in a statutory order, and each reduces the liability available to absorb the next. A taxpayer with several nonrefundable credits and a modest liability will not use all of them, and which ones are lost depends on the ordering rules rather than on which is most valuable to the taxpayer.

The general business credit under Section 38 aggregates most business credits and limits the amount usable in a year to net income tax reduced by the greater of the tentative minimum tax or 25% of net regular tax liability above $25,000. Excess amounts carry back one year and forward twenty. For a business with a large credit and a small liability, the credit is real but deferred — which changes its present value considerably.

Passive activity rules can suspend credits arising from activities in which the taxpayer does not materially participate, and at-risk rules can limit them further. Investors in rental real estate and similar structures frequently find that credits are trapped rather than lost, released only when the activity generates passive income or is disposed of.

None of this is a reason to forgo a credit. It is a reason to model when the benefit is actually realized, because a credit usable in year seven is not equivalent to cash today.

Frequently Asked Questions

What is the difference between a credit and a deduction?

A deduction reduces taxable income; a credit reduces tax directly. A $1,000 credit saves $1,000. A $1,000 deduction saves $1,000 multiplied by your marginal rate.

Are the clean energy credits still available?

Mostly no. Residential credits ended after December 31, 2025, and clean vehicle credits after September 30, 2025. A narrow set of business energy provisions remains subject to placed-in-service and begin-construction deadlines.

Does California offer the same credits as the federal government?

No. California has its own credit system and does not conform to OBBBA. Some federal credits have no state counterpart, and California offers credits with no federal equivalent.

What happens if a credit I claimed is disallowed?

You owe the tax with interest and possibly penalties. Disallowance for reckless or intentional disregard can bar you from claiming that credit for two years, and ten years for fraud. Form 8862 is generally required to claim it again.

Can unused credits be carried forward?

Many can. General business credits carry back one year and forward twenty. California business credits generally carry forward indefinitely. Refundable credits pay out immediately and do not need carryforward.

A firm contacted me saying I qualify for a credit I have never heard of. Should I proceed?

Be careful. Contingency-fee promoters marketing credits by cold outreach have driven most recent enforcement activity. Ask what specific statutory test you meet and what documentation supports it — and get an independent review before filing.

Do I need to claim a credit in the year I earned it?

Generally yes, though amended returns can claim missed credits within the refund statute — usually three years from the original due date. Some credits have their own election deadlines that cannot be fixed later.

Confirm What You Actually Qualify For

The credits worth pursuing are the ones you can document if examined. That is a different question from the one a promoter asks, and it is worth answering before a return is filed rather than after a notice arrives.

Pietro Canestrelli holds an LL.M. in Taxation and advises on credit qualification, documentation standards, and IRS and FTB examination defense. Schedule a consultation, or review our tax planning services.