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Investment Deduction

Updated on July 18, 2023

Investment deduction refers to an allowance granted for a qualifying depreciable asset, whereby a certain percentage of the asset’s original cost is added to the total depreciation write-off. This deduction is typically provided in the year the asset is acquired or as soon as feasible thereafter. The purpose of this allowance is to provide an additional benefit to businesses that invest in such assets, promoting capital expenditure and stimulating economic growth.

Understanding Investment Deduction in detail

When a business acquires a depreciable asset, it is generally not allowed to deduct the entire cost of the asset in the year of purchase. Instead, the cost is allocated over the asset’s useful life through depreciation. Depreciation represents the systematic allocation of the asset’s cost as an expense over time.

However, with investment deduction, businesses receive an additional benefit. A certain percentage, predetermined by the applicable tax laws or regulations, is added to the full depreciation write-off. This percentage is typically calculated based on the asset’s cost or the rate set by the government.

The investment deduction is usually granted in the year the asset is acquired or shortly thereafter, allowing businesses to realize the tax benefits sooner and enhance their cash flow. By adding a percentage of the asset’s initial cost to the depreciation write-off, businesses can accelerate the deduction of their investment, reducing their taxable income and overall tax liability.

The objective behind this deduction is to encourage businesses to make capital investments and stimulate economic activity. By providing this incentive, governments aim to spur growth, boost productivity, and incentivize businesses to invest in new equipment, machinery, or other depreciable assets.