Rizwan Virani is a senior managing director at alliantgroup, the nation’s premier provider of specialty tax services. Virani oversees alliantgroup’s energy incentives practice, which is comprised of energy modelers, engineers and government relations professionals who help qualifying U.S. businesses claim the Energy-Efficient Commercial Building Tax Deduction (commonly referred to as Section 179D). Visit alliantgroup.com.
Tax planning is imperative if your business has new or planned construction projects for the next year. Successful tax planning requires a keen interest in the details of your business, as well as a proactive approach to available federal and state tax incentives. Fortunately, construction firms can potentially qualify for many tax incentives. The following three incentives might be worth a closer look as you plan for 2018.
1. The Work Opportunity Tax Credit (WOTC)
The WOTC is meant to help Americans who face significant employment barriers and incentivize the businesses willing to hire them. The federal tax credit helps offset the cost of hiring new employees, and can yield a significant credit amount ranging from $1,200 to $9,900 per eligible employee. The exact credit amount depends on employee compensation, hours worked and which target group the employee is in. Certain target groups eligible for the credit include:
- Unemployed or disabled veterans
- Supplemental Nutrition Assistance Program (SNAP) recipients
- Temporary Assistance for Needy Families (TANF) recipients
- Supplemental Security Income (SSI) recipients
- Long-term unemployed (more than 27 weeks)
- Individuals convicted of a felony
- Residents of a Rural Renewal County or Empowerment Zone
Together, the disadvantaged groups above make up a significant portion of the population. It is likely that your business may hire a significant number of workers from one or more of the above targeted groups already. Many businesses have qualified WOTC employees within their workforce, but have never applied for the credit. Congress has extended WOTC through 2019, and companies should capitalize on this extension while filing their tax returns. The potential to see an immediate benefit from WOTC on your next tax return is reason enough to take a second look at this credit.
While business owners do not want to be intrusive or breach any employment laws, there are legitimate, unobtrusive ways to determine your company’s potential credit amount. Companies can use third-party vendors to screen their workforce for potential eligible employees. If it is likely that your company is hiring these people, then it is crucial to put a prescreening solution in place to ensure you are not missing any tax savings to which you are entitled.
2. The Energy-Efficient Commercial Building Deduction (Section 179D)
If your firm has worked on any construction projects for a government entity, it could potentially claim the 179D tax deduction. This incentive allows firms that have made energy-saving enhancements to the building to claim a deduction that is typically allocated to the commercial building owner. Since government entities are non-taxpaying entities, the government building owner can “allocate” its deduction to one of the firms that improved the energy efficiency of the building. New construction, as well as retrofits and renovations, are eligible for 179D.
For basic energy-saving improvements made to HVAC systems, building envelopes or interior lighting systems that surpass 2001 ASHRAE standards (or 2007 ASHRAE standards for buildings placed into service after 2016), construction firms can earn up to $1.80 per square foot. Section 179D has yet to be renewed for 2017 and onward. However, businesses are still able to look back and claim the deduction for properties put into service in open tax years. If your company worked on any government-owned properties between 2014 and 2016, you may can claim the deduction for past projects before these tax years close.
3. The Domestic Production Activities Deduction (DPAD)
This incentive rewards companies for manufacturing their products or performing services in the United States. Businesses outsource for a variety of reasons, but DPAD helps companies offset the costs of domestic production by offering up to a nine percent tax deduction on any income earned for these production activities. The production activity must take place in the U.S. to qualify for DPAD. Many construction firms and contractors do not take advantage of this incentive because it is traditionally thought to be a deduction for manufacturers. Yet, construction firms can claim this deduction for the new construction or renovation of any property inside the U.S. If your firm’s employees are in the U.S. and work on residential or commercial construction, renovations or land preparation, your business is a candidate for DPAD. In 2018, look back and see if your company’s work is eligible for the DPAD deduction.
Tax planning can be a daunting task, but by leveraging every available tax deduction or credit available to your business, you can see a significant reduction in your tax liability. With potential savings available, all tax incentives are worth a closer look.