The Hidden Tax Strategy Most People Don't Know About: Purchasing Tax Credits

Sep 12

When you first hear the phrase "purchase a tax credit," it might sound contradictory. After all, tax credits are supposed to save you money—like the Child Tax Credit, Adoption Credit, or American Opportunity Credit that reduce your tax bill or increase your refund. So how does buying a tax credit make financial sense?

The answer lies in an innovative tax strategy that creates a win-win situation for businesses and individual taxpayers alike.

How State Tax Credit Programs Work

State and local governments frequently offer tax credits to attract businesses and stimulate economic development. These incentives encourage companies to expand operations, relocate, or invest in specific industries within their borders.

Consider this example: Virginia decides to promote renewable energy and offers substantial tax credits to wind turbine manufacturers that establish production facilities in the state. A company that builds a new facility might receive $25 million in state tax credits to offset their Virginia tax liability over time.

This sounds like an incredible deal—and it can be. However, there's often a catch.

The Challenge: Timing Restrictions

Many state tax credit programs come with annual usage caps. In our wind turbine example, that $25 million credit might be limited to $1 million per year, meaning it would take 25 years to fully utilize the benefit.

For a growing business that needs capital now—perhaps to expand operations, invest in new equipment, or manage cash flow—waiting decades to realize the full value isn't ideal. The company might prefer immediate access to $20 million rather than $25 million spread over 25 years.

This creates an opportunity.

Enter the Tax Credit Market

Companies can sell their excess tax credits through specialized dealers, creating a secondary market that benefits everyone involved:

The company receives immediate cash (typically 80-85 cents per dollar of credit value)
The dealer earns a small profit margin
Individual taxpayers can reduce their state tax liability at a discount

How It Works for You

Here's a practical example of how purchasing tax credits could benefit you:

Your situation: You earn $100,000 annually and owe approximately $5,000 in Virginia state taxes.

The opportunity: You purchase $5,000 worth of tax credits from a dealer for 85 cents on the dollar, paying just $4,250.

The result: When you file your state tax return, you apply these credits to completely eliminate your $5,000 tax liability, saving you $750 in the process.

Who Can Participate?

The beauty of this strategy is its accessibility—virtually anyone with state tax liability can participate. You simply need to connect with a dealer who facilitates these transactions.

Important Considerations

While purchasing tax credits can offer significant savings, it's essential to work with experienced professionals who understand the nuances of these programs. Each state has different rules, timing requirements, and eligible credit types.

Ready to explore whether purchasing tax credits makes sense for your situation? The team at Independent Tax Advisors can help you navigate these opportunities and determine if this strategy aligns with your financial goals.

Daniel Morgan https://ifpinvest.com