Accounting for investment tax credit

The investment tax credit introduced by the Revenue Act of 196 caused a great deal of furor within the accounting profession in that there was not initially, or even today, any general consensus as to its proper accounting treatment. Basically, the investment tax credit provisions allow purchasers of equipment for business use, a direct credit against federal income taxes. The amount of the credit depends primarily on the cost of the equipment and it s estimated useful life. This paper discusses the proper accounting treatment to be rendered the investment tax credit and the controversies which it provoked in the accounting profession. The legislative history of the investment tax credit is reviewed in an at tempt to determine the intent of its creator and the Congress which enacted it. The paper then evaluates the various suggested treatments and their effect on income and financial condition. It goes on to investigate methods used in practice and indicates which methods were supported by various informed individuals. Finally, the paper relates the proposed methods to basic accounting theory and concludes that the "100 percent flow through" method is the treatment which is in accordance with acceptable and sound accounting principles.