ROADMAP OF THE INVESTMENT PROCESS
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DEPRECIATION DEDUCTIONS
Depreciation and tax credits work together. Depreciation acts first by reducing taxable income, and then tax credits are applied against the taxes that are due on the reduced income.
Depreciation deductions reduce TOTAL INCOME, which then reduces tax liability.
Depreciation is a cost recovery method that allows a taxpayer to deduct the cost of an asset over a specified period of time. The depreciation deduction reduces the amount of taxable income that is subject to taxation.
The value and economic benefit of the depreciation deduction is affected by the taxpayer's tax bracket. The higher the taxpayer's tax bracket, the higher the economic benefit from the depreciation deduction.
TAX CREDITS
A tax credit is a credit that is used as a non-cash form of payment or offset of income taxes owed by a taxpayer. Specific sections of the Internal Revenue Code provide for the allocation of tax credits to a taxpayer.
Internal Revenue Code 38 through 50 define many different qualifying investments and activities which are eligible for an allocation of tax credits. Tax credits are the result of a qualifying equity investment into a specific qualifying asset or activity, and are considered to be an incentive offered by Congress for making that investment. The amount of the tax credit received is usually a percentage of the cost of the qualifying investment made by the taxpayer.
Tax credits directly reduce Tax Liability on a dollar for dollar basis.
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