Tax Incentives Could Prove Helpful for the Construction IndustryOctober 30, 2012
Crystal A. Germanese, CPA
The Research and Development Credit and the 179D deduction are tax incentives available to companies in the construction industry that are often overlooked. Companies in the construction industry should consider whether these incentives would apply to their businesses before they unknowingly miss out on potential tax savings.
Research and Development Credit
Many business owners are unaware that research and development (R&D) tax credits may apply to activities they are already routinely doing, as there are many common misconceptions as to what types of activities qualify for the credit. The R&D credit is not limited to companies with laboratories full of scientists in white coats. Construction companies that simply develop, improve or refine products and processes may qualify for the credit.
Many companies in the construction industry have current practices in place that could qualify them for this credit. For example, developing solutions to build constraints, developing processes to improve installation efficiencies and employing engineers to design systems may be qualifying activities.
To qualify for the R&D credit, the activity must be related to the development of a new or improved business component, and the research must be undertaken to discover information that is technological in nature (in other words, it must rely on the principles of the physical, biological, engineering or computer sciences). Also, there must be some uncertainty as to the method, capability or design of the business component, and there must be a process of experimentation to overcome that uncertainty. The continuous evolution of technologies and construction processes provides opportunities for companies in the construction industry to take advantage of this credit.
The R&D tax credit is equal to 20% of the excess of a taxpayer's qualified R&D expenses for the tax year over a base amount. There is also an alternative simplified method available which may be easier to calculate for some businesses, equal to 14% of the excess of the qualified R&D expenses over 50% of the average costs for the last three tax years.
A corporation can use the credit to reduce its taxes owed dollar for dollar. In a case in which a partnership, S corporation, trust or estate pays for research expenses, the credit passes through to the partners, shareholders or beneficiaries. Currently, the R&D credit is only eligible on costs incurred before December 31, 2011. However, since the original creation, the credit has been extended 13 times, often retroactively. Also, the credit can be claimed for all open tax years, which means businesses can typically go back as far as three years to claim the R&D credit for federal tax purposes.
179D Energy Deduction
The 179D is a deduction for businesses, governments and designers when they build, renovate or design a building that is energy efficient. The maximum deduction is $1.80 per square foot of the building. Currently, this tax incentive is scheduled to expire at the end of 2013.
For an energy efficient building to qualify, it does not have to be a LEED certified building. Many new construction projects and energy efficient rehabilitations will qualify or partially qualify for 179D simply by meeting building code requirements, which are often more strict than the standard referenced for this deduction in the tax code.
There are three systems potentially eligible for this deduction. A system is considered qualified if it is being installed as part of a plan designed to reduce the total annual energy and power costs of the system by 50% or more in comparison to the standard. The three potentially eligible systems are:
- Building envelope
- Heating, cooling, ventilation and hot water system
- Interior lighting systems
A taxpayer can partially qualify for the deduction if only one or two of the systems qualify. In that case the taxpayer can receive a deduction for each qualifying system equal to $.60 per square for of the building.
For this tax incentive there are three different groups that can benefit: building owners, state, local and federal government building owners and designers of government-owned buildings. A designer of a government-owned building benefits by having the state, local or federal government entities transfer the tax benefit to them. A designer can include the architect, engineer, contractor, environmental consultant or energy services provider who creates the technical specifications for a new building or an addition to an existing building.
Since there may be multiple designers eligible for the allocation of the tax benefit, it is a good idea to incorporate the benefit up front during contract negotiation. If the tax benefit was not allocated to anyone that qualified, the government can go back to buildings and improvements placed in service in the last three years and allocate the tax benefit to designer after the fact. That means it is often beneficial to request the assignment even after the project has been completed and to make the request before anyone else.
While many people don’t often consider the construction industry when they hear about R&D and energy tax credits/deductions, it is indeed an industry that can take advantage of the potential savings. Business owners should be encouraged to consult with tax professionals to determine their eligibility for potential cost savings.
Crystal A. Germanese is a manager at BlumShapiro, the largest regional accounting, tax and business consulting firm based in New England, with offices in Connecticut and Massachusetts. The firm, with nearly 300 professionals and staff, offers a diversity of services which includes auditing, accounting, tax and business advisory services. In addition, BlumShapiro provides a variety of specialized consulting services such as succession and estate planning, business technology services, employee benefit plans, litigation support and valuation, and financial staffing. The firm, with offices in West Hartford and Shelton, CT and Boston and Rockland, MA, serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.