What Is an Investment Allowance?

An investment allowance is a type of tax break that is extended to companies as a means of motivating those companies to invest capital in various ventures. The idea is that by providing some sort of tax incentive, the activity will grow capital investment within the economy that ultimately benefits the economy and everyone who participates in that economy. Typically, there are limitations imposed in terms of how much of a company’s resources can be diverted into investments, usually in the form of an annual investment allowance set by each of the relevant tax agencies.

With an investment allowance, a business has the opportunity to divert a portion of its earned income into investment opportunities that meet the basic criteria established by a tax agency. Not all forms of investment will necessarily meet the qualifications set by the revenue agency in question, making it necessary for business owners to become familiar with all investment types that would be eligible for the tax break. In addition, it is not unusual for national tax agencies to develop a scale of how much of an allowance a given company may claim each tax year, based on factors such as industry type and the size of the business operation in terms of generated revenue or net profit.

The ultimate goal of providing some sort of investment allowance to qualifying companies is to enhance the chances that those businesses will be able to continue operations and contribute to the health of the economy. In addition to promoting growth of those businesses receiving the deduction, the ability to acquire other investments means that more money is circulating through the economy, aiding in the financial stability of the nation. When managed properly, the creation of regulations that set the criteria and maximum amounts for the annual investment allowance can go a long way toward avoiding undesirable extremes within the economy, something that in turn allows consumers to feel more secure and ultimately more likely to continue buying goods and services at an acceptable pace.

While normally associated with a national agency, there are some areas of the world in which state or provincial tax agencies also offer some type of investment allowance as a tax break to qualifying businesses. When this is the case, the total investment allowance provided to a company may be based on a ceiling figure that will apply to the cumulative tax breaks issued by all relevant agencies, or each agency may set a maximum allowance that does not impact the deductions provided by other jurisdictions. Since laws vary regarding how the investment allowance may be determined, it is important to work with tax professionals to understand how claiming an allowance on a state level return may or may not have some impact on the amount of the deduction that may be claimed on a national or federal tax return.