What Is a Capital Investment Tax Credit?

Helen Akers
Helen Akers
Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

A capital investment tax credit is a financial incentive for businesses or individuals to contribute to economic growth. Certain amounts of money that are contributed to the development of business operations become tax deductible. To be classified as a capital investment, the amount is typically substantial and may vary depending upon the local jurisdiction's tax regulations. The capital investment tax credit reduces income tax obligations by depreciating the expense or directly reducing the taxable income over a period of time.

Businesses usually need large amounts of financing and investments in order to fuel expansion projects, such as new product lines. Organizations may rely on a variety of sources to sustain these types of projects. Some of those sources might include internal profits, public and private investors. A capital investment tax credit allows a business to reinvest profits into new projects without having to pay tax on a percentage of its income.

Depending upon local tax regulations, what qualifies as a capital investment tax credit may vary. For example, some jurisdictions require individuals to contribute to a business that is certified by the local government. These local areas may mandate that individual investors officially notify government officials that they wish to receive a tax credit and get the projected amount certified. This process usually includes submitting an official investment proposal and providing the government with proof that the promised amount was invested in the chosen entity.

The amount of the capital investment tax credit may be a percentage of the investment. For example, if a private investor contributes $500,000 US Dollars (USD) and the capital investment credit is set at 25 percent, the tax credit would be $125,000 USD. At times the amount of the credit may be greater than the investor's yearly tax obligation. In most cases, the remaining amount from the tax credit is carried over into subsequent years until it is dissolved.

Businesses that decide to use financial assets to embark on large expansion projects may qualify for yearly tax credits. An example of a capital project may be the building of a new manufacturing plant or corporate headquarters. Jurisdictions tend to provide tax credits as a means of encouraging business development and job creation. In some areas, all expenses related to the capital project may count towards the amount of the tax credit, which might extend for up to 20 tax seasons.

Tax credits taken by a business typically have to undergo an approval process. Organizations work with local governments prior to commencing work on a capital project. Once the approval and negotiation processes are complete, the business is eligible to reduce its tax liability by a certain percentage amount, as long as the expenses fall within the jurisdiction's parameters for capital investments.

You might also Like

Readers Also Love

Discuss this Article

Post your comments
Forgot password?
    • Businesswoman talking on a mobile phone
      Businesswoman talking on a mobile phone