When tax time rolls around, it is not uncommon for contractors to feel like the deck is automatically stacked against them. But the right tax planning strategy gives you a few “aces up your sleeve” to ensure the House, in this case – the IRS, doesn’t catch you off guard. When you add in the challenges and uncertainties of late, understanding the tax benefits available to you is more important now than ever. These tax benefits could help you improve your hand and save a substantial amount of money. As you build your 2021 tax planning strategy, there are several tax credits and deductions contractors should consider.
Work Opportunity Tax Credit
The work opportunity tax credit (WOTC) is a federal general business tax credit obtainable by employers for hiring employees from certain targeted groups like veterans and supplemental security income (SSI) recipients. Eligibility is based on pre-screening requirements, and there are credit limitations.
The Consolidated Appropriation Act (CAA) extended the WOTC until December 31, 2025. If the House-passed version of the Build Back Better Act (BBBA) is enacted, the legislation will make additional changes effective during the COVID-19 recovery period, which runs through the end of 2022, including increasing the credit amount from 40% to 50% of wages (or qualified second-year wages) per qualified individual, increasing the limitation on wages taken into account from $6,000 to $10,000, and expanding eligibility to qualifying rehires.
Employee Retention Credit
The employee retention credit (ERC) is a tax credit available for eligible employers to claim against qualified wages paid after March 12, 2020, through December 31, 2021. Eligible employers may claim a refundable tax credit against their share of Social Security tax equal to 50% of qualified wages paid to employees after March 12, 2020, and through December 31, 2020, and 70% of qualified wages paid to employees after December 31, 2020, and through December 31, 2021. Qualified wages for 2021 are limited to $10,000 per employee per calendar quarter, meaning the maximum ERC is $7,000 per employee per quarter.
179D Commercial Buildings Energy-Efficiency Tax Deduction
The 179D tax deduction allows eligible builders to claim a tax deduction for installing certified energy-efficient systems and buildings. The CAA made the deduction for energy-efficient commercial buildings permanent. Generally, a tax deduction of $1.80 per square foot is available to owners of new or existing buildings who install interior lighting, a building envelope, or HVAC or hot water systems that reduce the related energy and power cost by 50% or more in comparison to the minimum requirements in place.
Under the latest version of the BBBA, for taxable years beginning after December 31, 2021, and before January 1, 2032, the base credit amount for certain property would be equal to $0.50 increased (but not above $1) by $0.02 for each percentage point by which the total energy and power costs for the building for the year are certified to be reduced by 25%. The bonus credit amount would be equal to $2.50 increased (but not above $5.00) by $0.10 for each percentage point greater than 25%. Credit amounts would be adjusted for inflation in years following 2022.
The BBBA would also change the lifetime cap to a 3-year cap on the maximum amount of deduction for a building. Qualifying taxpayers would also be able to elect to take an alternative, parallel deduction for energy-efficient lighting, HVAC, and building envelope costs placed into service in connection with a qualified retrofit plan. In addition, the BBBA would provide a bonus credit amount for certain property that satisfies wage and apprenticeship requirements during the “construction, alteration, or repair” of any property or building modifications.
Research and Development Credit
The federal R&D Tax Credit was established to keep jobs closer to home to promote growth & development with innovative new technologies, designs, and engineering to make the U.S. a solid, self-sufficient nation. Most states in the U.S., including all states in New England, offer R&D tax credit incentives as well.
The expenses your business acquires to research and develop new ways to run your business may qualify for the research and development (R&D) credit. Construction companies can take advantage of this tax credit for research activities that are new to the world or new only to the company itself. There are no limitations on the expenses that you can claim each year as long as all of the activities and expenses qualify as research and development.
Under the Tax Cuts & Jobs Act (TCJA), research and development costs would be amortized beginning in 2022. However, if the BBBA passes as is, the legislation would delay that application, meaning these costs may be fully-expensed until after 2026.
While these tax credits and deductions can provide significant savings, fully leveraging the benefits requires some complex calculations. For example, R&D tax credit eligibility is based on your Qualified Research Expenses (QREs) related to their Qualified Research Activities (QRAs), and the 179D deduction must be calculated using qualified computer software. ARB’s Construction Services Group can assist with these calculations and other tax planning efforts. We want to help you ensure you’re playing for the win, not just making the best of the cards you’ve been dealt.
The BBBA provisions are also subject to change, as the fate of the legislation still rests with the Senate. We are watching the situation closely as negotiations continue and will issue updates accordingly.
by David Jean, CPA, CCIFP, CExP
David Jean is a principal at ARB and the Practice Leader for the firm’s Construction & Real Estate, Succession Planning, Professional Services Firms, and Business Advisory Services Teams. David provides specialized tax, financial accounting, and business advisory services primarily to construction, real estate, and manufacturing companies. He is a member of the NASBP’s Certified Public Accountant Advisory Council. As a Certified Exit Planner and the Director of Altus Exit Strategies, a wholly-owned subsidiary of ARB, David uses The Seven Step Exit Planning Process™ to help business owners and their exit teams create, customize, implement, and successfully execute comprehensive succession and exit plans.