At the law offices of The Tax Credit Attorney, we specialize in tax credits related to:
Â· Renewable Energy Property Tax Credits
Â· Low Income House Tax Credits
Â· Hiring and Employment Tax Credits
Â· Film and Entertainment Tax Credits
Introduction to Tax Credits
Tax Credits are used to pay state and federal income taxes. Tax credits are not cash, but have the value of cash, much like a gift certificate that can be redeemed for a certain value. While most taxpayers simply write a check to the IRS to pay their income taxes, a taxpayer using tax credits does not write a check to the IRS. Instead an IRS form is attached to the tax return showing the value and type of tax credit being used. The Tax Credit reduces or eliminates the income tax that is due. Tax credits may be used by a taxpayer to pay all or part of its income taxes to the state or federal government.
Tax Credits are awarded to a taxpayer through laws enacted by the United States Congress as an incentive or reward for making an investment in certain types of property or activities. The incentives are much like frequent flier miles awarded to passengers that fly on a particular airline, or reward points awarded each time a certain credit card is used to make a purchase. The frequent flier miles can be redeemed for free travel and the reward points can be redeem for free merchandise. Tax credit programs provide a reward or incentive to taxpayers who make an investment into certain Qualifying Property or Activities by giving a credit against income taxes. The term â€œqualifyingâ€ simply means that the property or investment complies with the Internal Revenue Code rules and regulations; much like the terms and conditions that apply to frequent flier miles and reward points.
Introduction to Depreciation
When qualifying property is purchased, the cost of the property may be recovered by the taxpayer by taking a depreciation deduction in addition to the tax credits that are awarded. The depreciation deduction reduces the taxable income of the taxpayer which reduces the amount of income tax. As an incentive or reward, Congress provides accelerated depreciation on certain qualifying property allowing the taxpayer to recover the cost of the property over a shorter period of time. As an example, the cost of energy property can be depreciated in just 5 years.
Purpose of Tax Laws Enacted by Congress
The purpose of the tax laws enacted by Congress is to offer incentives to attract investment capital into qualifying property such as renewable energy property or affordable housing for families and seniors. This creates an opportunity where an equity investment into qualifying property provides the dual benefit of both investment and income tax relief. The tax incentives that are attached to the investment are large enough to offset or pay the income tax owed by the investor. In effect, instead of paying income taxes, the same tax funds are re-directed to an equity investment which provides tax incentives in an amount sufficient to offset the income tax otherwise payable by the taxpayer. A tax debt has been converted to an equity investment that produces income to the taxpayer. The incentives that provide this tax benefit are tax credits and depreciation.
Disclosure: Pursuant to IRS Circular 201, this website does not constitute tax advice and you may not rely upon the information contained herein. The tax code is complex and small changes in facts may result in adverse tax treatment. Tax advice may only be relied upon when obtained pursuant to an attorney- client relationship as evidenced by a retainer agreement between the taxpayer and the attorney.