Investment Credit

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Reduction in income tax liability granted by the federal government over the years to firms making new investments in certain asset categories, primarily equipment; also called investment tax credit. The investment credit, designed to stimulate the economy by encouraging capital expenditure, has been a feature of tax legislation on and off, and in varying percentage amounts, since 1962; in 1985 it was 6% or 10% of the purchase price, depending on the life of the asset. As a credit, it has been deducted from the tax bill, not from pretax income, and it has been independent of Depreciation. The Tax Reform Act of 1986 generally repealed the investment credit retroactively for any property placed in service after January 1, 1986. The 1986 Act also provided for a 35% reduction of the value of credits carried over from previous years, which was later changed to 50%.