CPA & Business Advisory Blog

Construction Industry Tax Incentives

With tax season well under way, we’re sure you’re looking for ways to minimize your tax liabilities. Of the many savings available, there are two tax savings options that construction companies should have on their radar: the R&D Tax Credit and the 179D Tax Deduction.

Established in the Economic Recovery Tax Act of 1981, the R&D Tax Credit allows companies creative innovative products and procedures to receive tax incentives. Historically applied to technological and biomedical research work, the scope of what the government considers “research and development” has expanded over the years to include work done in the construction industry. Now, contractors, engineers, and architects can qualify for R&D tax incentives that cover employee wages, cost of materials used for R&D, and payments made to consultants for engineering and testing.

Because the construction industry is driven by ingenuity, many commonplace industry practices can be considered research and development. Contractors brought in on pre-construction planning activities will qualify for the credit, including electrical and mechanical contractors. Developing building designs, designing unique bridges and roadways, LEED projects, and improving buildings’ power efficiency are all activities that may qualify your company for tax savings.

While the R&D tax credit is a dollar-for-dollar reduction in taxes owed, 179D is a tax deduction that reduces taxable income for the year. Established by the Energy Policy Act of 2005, 179D is a deduction for constructing or renovating energy efficient commercial property buildings and is available to building owners. There is also an opportunity for the designer (architects, engineers, and in some cases, contractors) of energy efficient property installed in government buildings to take the deduction, even though the improvements were not to their building.

Projects that qualify for 179D must reduce total annual energy and power costs with improvements to a property’s  “building envelope” or to the interior lighting, heating, HVAC, or hot water systems. The maximum available deduction is $1.80 per square foot for a 50% reduction in total annual energy and power costs. Partial deductions of 60¢ per square foot are available for energy cost reduction improvements to an individual qualifying area listed above (building envelope, lighting, or HVAC and hot water systems). There are also partial deductions (less than 60¢ per square foot) for lighting-focused improvements.

While both incentives can create significant tax savings, eligibility requirements are strict. For those seeking the R&D credit, research and development activities must be thoroughly documented and supported; and properties being considered for 179D must be inspected by a certified engineer or contractor. We encourage you to consult a tax professional to confirm that your company is eligible and has the required documentation. Our Real Estate and Construction advisors  are more than happy to assist you. Just leave a comment below or contact Roger Gingerich or Dave Walter at 440-449-6800.

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