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An investment credit is a tax credit that a business can use to offset some of the capital expenditures that it makes in a project. This credit is 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, and if they don't have a clear profit that is attainable in a relatively short period of time, the company may not feel the investment is worthwhile. An investment credit helps make the investment pay off more quickly.
In a traditional business model, a company may make a purchase of a large piece of machinery to manufacture a certain product, for example. This is known as a capital expenditure. Typically, commonly accepted accounting rules allow a business to depreciate the value of that capital equipment over a period of times. Even using the depreciation credit available under most tax laws, some businesses may refrain from taking risks by investing capital dollars on an investment project.
In order to spur development of certain industries, or to generate new business opportunities in a given industry or area, a governing taxing body will sometimes allow an additional credit to be deducted, thereby lowering a business's tax liability and increasing its profits. Examples of investment credit can be found in the incentives that some governments offer for development of clean power, such as solar and wind projects, and for development of alternative fuel vehicles. Normally a business would not have an incentive to make large capital investments in these type of new technologies because the profit window, 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 an investment credit, however, a business is more likely to invest the capital cost of such technologies.
Some detractors of this model of encouraging new business development complain that these type of investment credits only benefit 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 had not investment credits been in place 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, as well as creating new businesses and industries in areas that normally would not be profitable to pursue.
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