As we all work quickly through our business day, there’s a tendency to use shorthand to describe various financial instruments, initiatives and strategies. We all do it. But sometimes the meanings can become lost.
In recent interactions with our clients, I have noticed some confusion between the phrases: “tax credit investment,” “working capital needs” and “capital investment.” Each term is uniquely different…and while the last two are indeed aligned with general business or investment strategies, the first term — tax credit investment— is strictly about reducing a tax bill.
Allow me to elaborate:
During this extremely difficult and unpredictable past year, both businesses and individuals have contemplated worst-case financial scenarios and the need to be fiscally conservative. Understandably, much of the U.S. quickly converted from a spending economy to a saving economy. And while we are all extremely encouraged that a vaccine for the COVID-19 virus could be available to the general public by the middle of 2021, there is still a great deal of uncertainty in our lives. The prospect of moving beyond this pandemic is a heady proposition. There remains much anxiety over our nation’s ability to navigate the next seven months and remain healthy —both physically as individuals and fiscally in our businesses.
Accordingly, many of our clients who are contemplating a tax credit acquisition have expressed concern that they may need to “hold on to cash” as a protective hedge against any potential deeper business downturn — should there be a worsening of the pandemic. After hearing this sentiment several times, I realized that these clients — developers and investors — may be mischaracterizing the purpose of a tax credit investment: considering it to be an alternative to general business spending or capital needs. That’s not its purpose, or its primary effect.
A tax credit investment should be seen for what it is: an alternative to paying Federal taxes. It should only be made with funds that otherwise would be used to pay taxes. Whether or not there is a future, or continuing slowdown of your business due to COVID-19, taxes will still be due. So, unless you are not going to owe any taxes, a carefully planned tax credit investment still allows you to decrease your tax bill by 20% or more.
A decrease in the amount of taxes that you pay will free up cash for additional business investment or working capital needs, or for personal expenditures. It is an additive to your personal or business resources; a shelter or hedge against large tax payments; and not an alternative use of scarce cash resources.
How to properly gauge the potential benefits and pitfalls of tax credit acquisition or investment? We suggest speaking with a financial professional who is fully versed in the field of tax credits as well as tax planning and tax law. This is where the team at Cherrytree is pleased to assist. We’ll help you weigh the pros and cons of any new tax credit initiative — always measured against the current financial climate. Send an email to me or to my colleague Melina Ambrosino to ask to schedule a phone conference to help you fully understand your financial options as we move into 2021.
And our best wishes for a healthy, prosperous year to come.