An investment credit is a tax credit that a company can use to offset some of the capital expenditures it makes on a project.
An investment credit is a tax credit that certain qualified businesses can use to offset some of the capital expenditures made in a given year. The credits generally work to lessen the overall tax burden of the business. Not all countries have investment credits, and they also tend to work in different ways in different places. In general, however, they are used as an incentive to encourage companies to spend money up front on investments that may not pay off right away. Businesses must make a profit to remain viable in most cases, which can make large investments seem too risky. Credits are generally designed to help business owners realize the return on investment more quickly and can make the whole process more attractive to executives and other business leaders. However, it is not without its critics, and most countries that offer the credit face complaints that it favors big industry or provides an unnecessary break. However, in most places it is still very popular.
Role of large investments in business in general
Running a business is often a very expensive proposition, at least initially. To make a profit, it is usually essential for owners to invest a lot of money in both personal and physical things: commercial space, specialized machinery and tools, for example. Most larger purchases can be classified as “capital expenses” based on the tax code for the business’ principal place of operation or incorporation. This generally means a couple of things from a tax perspective.
Generally accepted accounting rules allow a business to depreciate the value of that capital equipment over a period of time, and tax deductions are often available as well. However, even using the depreciation credit available under most tax laws, some businesses may refrain from taking risk by investing capital dollars in an investment project. This is precisely where investment credit comes in. It usually supplements other deductions and incentives to reduce a company’s total tax liability in a given year.
Motivations behind the credit
In almost all cases, credit is designed to motivate businesses to spend the money needed to provide important goods and services to society. According to some of the most ardent supporters, credit is crucial in helping to facilitate the type of investment necessary for a prosperous market and economic sector.
Sometimes the credit is also designed to stimulate the development of certain industries or to generate new business opportunities in a certain area. Governments sometimes allow additional or bonus credits for these activities. The development of clean energy, such as solar and wind projects, and the development of alternative fuel vehicles are two examples. Typically, a company would not have an incentive to make large capital investments in these types of new technologies because the earnings window, or the period in which the company can reasonably expect to generate a profit from the investment, is too small. However, with the added incentive of a tax credit, a company is more likely to invest the capital cost of such technologies.
National variations and differences
Each country has its own tax code, and with its own specifications regarding business investment credits. Not all countries offer this type of incentive, and even those that do tend to have widely varying requirements for claiming and proving eligibility. Anyone intending to offset an investment with a credit is generally wise to first research the provisions of the most current local tax code.
controversy and criticism
Some critics of this model of encouraging new business development complain that credit only benefits larger investors who have capital reserves to invest. While this might be the case with new technologies, most economists agree that credits generally work, as many new technologies simply would not have existed without credits to defer the cost to businesses. These types of tax liability mitigation devices, coupled with accelerated depreciation schedules, often help drive development in new areas of technology and often also create new businesses and industries in otherwise unprofitable areas. .