Below is a summary of the major tax incentives that Congress has put in place to encourage certain behaviours by US corporations.
Domestic Production Activities Deduction (DPAD)
In an effort to encourage companies to keep their manufacturing processes in the United States, Congress came up with the Domestic Production Activities Deduction (DPAD). The DPAD allows US corporations to reduce their taxable income by 9% of their income from domestic production. This provision was created in response to many businesses outsourcing production to cheaper overseas facilities.
Foreign Tax Incentives
Multinational companies are not required to pay US taxes on profits earned overseas until they bring the earnings back to the US. This has created an incentive for US companies to keep cash overseas to pay taxes at a preferential rate. With the passage of the new US tax law in December 2017, the corporate tax rate was reduced to 21%, which should theoretically reduce some of that incentive to keep profits away from US taxation. But, the law also allows businesses to keep a portion of overseas profits tax free, which could continue incentivizing manufacturing in other countries.
State and Local Bonds
In order to encourage investment in state governments and local communities, Congress exempted state and municipal bonds from federal taxation. This incentivizes corporations (and individuals) to purchase these types of bonds. The logic in this type of policy is that these funds are frequently invested in programs that benefit local communities, unlike federal or corporate bonds.
Environmental Tax Credits
As part of the United States’ move towards environmental stability, the EPA has introduced a system of tax credits that incentivize US companies to reduce their emissions. The main type of these incentives is called Emission Reduction Credits or ERCs. Polluters are given a specified rate of pollution and earn a tax credit by reducing their rate of emissions below the threshold. Many of these credits are grouped into a ‘General Business Credit’ for tax purposes, including the biodiesel fuels credit, alternative motor vehicle credit, and the renewable electricity production credit.
In order to incentivize research and development, the research credit is available for companies that make qualified research expenditures (QRE). A QRE must involve developing products, manufacturing processes, or software in the US. The amount of the credit is usually 20% of all QREs above a certain base amount. This credit has been a boon for US corporations every since its inception in 1981.
Credit for Low-Income Housing
Congress wanted to incentivize real estate developers to set aside a portion of the homes they build for low-income people. So, they offered a sizeable tax credit for developers who engage in this type of practice each year. The result has been companies setting aside 20%-40% of the certain developments for those whose income is well below the median gross income for the area.