An investment credit is a tax credit that certain qualifying businesses can use to offset some of the capital expenditures made in a given year. Credits usually work to lessen the company’s overall tax burden. Not all countries have investment credits, and they also tend to work in different ways in different places. In general, though, they’re used as an incentive to encourage companies to spend money upfront on investments that may not pay off immediately. Business must generate a profit to remain viable in most cases, which can make big investments seem too risky. Credits are typically designed to help business owners realize the investment’s benefits more quickly, and can make the process as a whole more attractive to executives and other business leaders. It’s not without its critics, though, and most countries that offer the credit face complaints that it favors big industry or provides an unnecessary break. In most places it remains very popular, though.
Role of Big Investments in Business Generally
Running a business is often a very costly proposition, at least at first. In order to make a profit, it’s usually essential that the owners invest a lot of money in both personnel and physical things — business space, machinery, and specialized tools, for instance. Most larger purchases can be classified as “capital expenditures” under the tax code relevant to the business’ primary place of operation or incorporation. This usually means a couple of things from a tax perspective.
Typically, commonly 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, too. Even using the depreciation credit available under most tax laws, though, some businesses may refrain from taking risks by investing capital dollars on an investment project. This is precisely where the investment credit comes in. It usually complements other deductions and incentives to lower a business’ total tax liability for a given year.
Motivations Behind the Credit
In nearly all cases, the 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, the credit is crucial to helping facilitate the sorts of investment needed for a thriving marketplace and economic sector.
The credit is sometimes also designed to spur development of certain industries, or to generate new business opportunities in a given area. Governments sometimes allow additional or bonus credits for these activities. The development of clean power, such as solar and wind projects, and the development of alternative fuel vehicles are two examples. Normally a business would not have an incentive to make large capital investments in these types of new technologies because the profit window, or the period in which the company can reasonably expect to generate a profit off of the investment, is too small. With the additional incentive of a tax credit, however, a business is more likely to invest the capital cost of such technologies.
Variations and National Differences
Each country has its own tax code, and with it its own specifications surrounding credits for business investments. Not all countries offer this sort 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 usually wise to research the provisions in the most current local tax code first.
Controversy and Criticism
Some detractors of this model of encouraging new business development complain that the credit only benefits the largest of investors who have capital reserves to put into investments. While this is might be the case with new technologies, most economists agree that the credits do usually work, as many new technology simply would not have existed without credits to defer the cost for companies. These types of tax liability mitigation devices, coupled with accelerated depreciation schedules, often help spur development in new areas of technology, and usually also create new businesses and industries in areas that might not otherwise be profitable to pursue.