Qualifying Investment

Reviewed by Bhavana | Updated on Jul 30, 2021


What Does “Qualifying Investment” Refer to?

It refers to an investment that has been purchased using pretax income, usually in the form of a contribution to retirement policy. Funds used to purchase a qualified investment will not be subjected to taxes until they are withdrawn by an investor.

Here, pretax earnings refer to the income of a company after all operating expenses, including interest and depreciation, were deducted from total sales or revenues, but before taxes on the income were subtracted.

Since pretax profits exclude taxation, this measure allows companies to assess their intrinsic productivity across sectors or geographic regions where corporate taxes vary.

How Does it Function?

A qualifying investment renders an incentive for an individual to contribute by deferring taxes to certain forms of savings accounts until the investor withdraws the funds. Contributions to eligible accounts minimise the taxable income of an individual in a given year, thereby making an investment more appealing than a similar investment in an unqualified account.

Why is a Qualifying Investment Important?

A qualifying investment can be made in various plans, trusts, retirement schemes, and several other savings accounts. This basically works in the U.S. The tax-deferred status of a qualifying investment has major advantages, particularly for long-term investors.

When Will an Investment be Treated as a “Qualifying Investment”?

An investment in a firm will be considered as a qualifying investment when it abides certain conditions. The primary conditions which need to be met include:

  • Investment is a subscription for qualified, eligible shares

  • The firm utilises the amount subscribed for business-related reasons, such as for executing a trade, or for reasons related to executing of Research and Development and Innovation (R&D+I)

  • Investment is made on the basis of a business plan

Generally, tax-deferred status qualified investments include stocks, annuities, bonds, retirement savings plans, and specific types of trusts.

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