What are investment tax credits?
Investment tax credits are incentives issued by the government to encourage private investments. The government issues the investment tax credits on the basis of a percentage of the applicable eligible investment. In other words, companies that invest in certain eligible activities can save money on tax obligations that may occur in the future. In Puerto Rico, a number of investment tax credits are governed by Act 60 of 2019, also known as the “Puerto Rico Incentives Code”.
What companies can benefit from investment tax credits?
Under Act 60, investment tax credits in this context come from four main sources:
1 - Tourism
2 - Manufacturing
3 - Research and Development
4 - Creative Industries
If your company operates a business or invests in one of these areas, may be eligible to issue investment tax credits.
How may a company benefit from receiving a tax credit grant?
Implementing tax credits can be an effective strategy to optimize cash flow and reduce taxes. In some cases, the beneficiary could obtain an economic benefit ranging from 10% to 50% of the total project’s cost. The company that receives the tax credit grant may choose between: (1) reduce a current tax liability, (2) reduce a future tax liability or (3) monetize the credit by selling the tax credit at a discount to another taxpayer who owes taxes.
How may you or your company benefit by purchasing tax credits?
Even if you operate or invest outside the activities eligible for credits, you or your company may substantially benefit by purchasing credits from a company that is selling them.
For instance, assuming you buy the credits at 90 cents on the dollar, you’ll effectively be saving 10% in that portion of your tax liability. In other words, a person or company that buys $1 million of credits at 90 cents on the dollar, would save about $100k in tax expenses.
What are some challenges in the local tax credit market?
Although beneficial, the tax credit environment is complicated and hard to navigate. While information about how to apply for tax credit grants is publicly available, the process is somewhat cumbersome, especially for people without prior experience in the process. _________________________________________________________
Pursuing value creation using investment tax credits has the potential to add significant economic benefits, not only for companies receiving the grant, but also for a taxpayer buying them in the secondary market.
The potential for maximizing value increases with a well-crafted strategy, executed with sufficient time, and having an adequate understanding of the process.
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About the authors
Jesus Daniel Mattei is Founder and Managing Member at Rockelis Partners in San Juan, Puerto Rico, where Sergio Zahra is Financial Analyst.