Business Tax Credits

All the action in the domestic tax law has been credit incentive. Congress uses tax law to achieve public policy especially energy alternative and domestic renewable energy source. When congress passed the Budget Act in 1974, they change the nation tax law, giving the tax break to individual, corporation or entity to achieve public policy aim.

There are several examples for federal policy. One of the examples is research and development credit to keep the company innovation. Besides that, domestic manufacturing has some special deduction in section 199. The government gives tax credit to community development for business that invests in low income housing or new market area. When there are disasters, the government will come in and they will provide regional tax credit benefit to encourage investment in particular area.

Besides federal policy, there is also state policy. The tax credit in state level is to motivate and drive certain behavior in the boundary. Corporation, businesses or individual make contribution to organizations within the state or do certain things to improve the environment can receive tax credit from the states.

There are several energy tax credit that corporations and individual can benefit from, two major type is energy credit (ITC) and renewable energy credit (PTC). Energy credit includes solar credit, fuel cell credit and so on. This is for company when they install solar panel or solar facility part of the cost will be paid by the government as an investment credit. The investment tax credit is the percentage of the cost that incur when they buy the equipment to have it installed. The renewable energy credit is the production tax credit. It bases on the kWh being generated using the renewable sources. There is also energy building deduction for company build a green building, which use energy efficient system. Individual can benefit from the energy efficient appliance credit and residential energy efficient property.

Income tax credit is a powerful tool to reduce your federal income tax. While deduction can only deduction can only good to the extent of marginal tax rate. If a business is in a loss situation the deduction can only increase the net operating loss. When the loss is so big, companies cannot really get cash benefit from the deduction. Tax credit is taken after computing all the deduction and exemption. Companies get a direct deduction without compute the tax credit with the marginal tax rate which results in permanent tax savings and reduce the effective tax rate for the company. Company can sell or transfer tax credits which open a market for unused tax credit,