Posted by Jeffrey Feingold on 03.24.21
With another tax season underway, those who work in the construction industry are likely seeking ways to reduce their tax liabilities. Fortunately, there are two great ways construction companies can save thousands to millions of dollars—the research and development (R&D) tax credit and the 179D energy tax deduction.
The federal government implemented the Research and Experimentation tax credit in 1981 to create jobs and spur technology in the U.S. Known as R&D tax credits, the program was meant to be a temporary measure to give the economy a boost.
After many temporary extensions, the tax credit was made permanent by Congress in 2015 to allow companies that create innovative products and processes to receive tax credits for the qualified activities they conduct. 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.
When you think about it, the very nature of the work performed by the construction industry is innovative. That means contractors, engineers and architects may qualify for R&D incentives to cover areas such as employee wages, material costs and payments made to outside consultants for engineering and testing. Other activities include the design of buildings, bridges, roadways and LEED projects.
Established by the Energy Policy Act of 2005, the 179D is a tax deduction business owners can take to reduce the initial costs related to energy-efficient buildings. Architects, engineers or contractors involved in the design work of government-owned buildings may also qualify. While the R&D tax credit is a dollar-for-dollar reduction in taxes owed, the 179D tax deduction reduces taxable income for the year.
Properties that qualify for 179D must reduce total annual energy and power costs with improvements to the 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% deduction in total annual energy and power costs. Partial deductions are available for energy cost reduction improvements and lighting-focused improvements.
Both the R&D tax credit program and the 179D tax deduction require careful documentation to prove eligibility. For example, properties being considered for 179D must be inspected by a certified engineer or contractor.
Tax Point Advisors provides R&D tax credit study services and other specialty tax services to CPA firms and their clients throughout the U.S. To learn more about R&D tax credits and the 179D tax deduction from the experts at Tax Point Advisors, please call us at (800) 260-4138 or please leave us a message below.