What is a Tax Credit and How Do They Work?

A tax credit is like a coupon that a company can use to reduce the amount of state income taxes it owes. Here’s another way of looking at it: Company A owes $500 in taxes to the state. The more credits Company A has, the less it pays. These credits are helpful because Company A has a state income tax liability.

Now let’s say that Company B has a large warehouse in Janesville that is used for storage and distribution of goods that are shipped out of Wisconsin. Company B certainly does a lot of business here, and pays other kinds of taxes (such as property taxes on its warehouse). However, since Company B doesn't actually sell anything here—and therefore doesn't generate taxable income—they likely will not have any state income tax liability. Offering Company B a coupon to reduce taxes that it doesn’t owe does not provide them with a useful economic incentive.