Define an Investment Tax Credit

Operation

A credit is money that is deducted from tax due to the Internal Revenue Service or to a state or local tax authority. The credit may be limited to a certain percentage of the amount invested, up to and including a maximum fixed amount that can be further extended each year by Congress.

The investment tax credit began in 1962 as a form of financial subsidy to corporations facing foreign competition. Since that time, investment tax credits have further expanded to assist urban development, the alleviation of pollution and the building of renewable energy or conservation systems.

In 1986, Congress passed the Federal Historic Rehabilitation credit for the renovation of historically important buildings. In the same year, the Low Income Housing Tax Credit allowed developers to claim investment credits on the cost of building or renovating low-cost housing units. The Work Opportunity Tax Credit is available to employers that hire and train groups considered disadvantaged in the job market, such as military veterans and unskilled young people. The IRS also offers credits for the purchase of alternative fuel vehicles, investment in disaster relief programs and infrastructure, important scientific research and to industries deemed worthy of support against foreign competition.

In 2009, Congress passed the American Recovery and Reinvestment Act. This credit -- extended from previous versions offered by the federal government -- was offered to taxpayers who invested in renewable energy projects, such as solar- or wind-powered systems, biomass fuels, geothermal energy and other technologies designed to replace the use of fossil fuels.

If the amount of the credit exceeds the amount of tax due in any single year, the credit can generally be carried forward to future years (usually subject to a "sunset" or time limit provision). On the state or local level, these credits may be counted against income taxes or property taxes if the credit involves development or rehabilitation of real estate. The business tax credit, in theory, encourages worthwhile economic activity that would otherwise be unprofitable or impractical for private business.