Tax season for 2015 has finally wrapped. Are you wondering if you should have gotten a bigger refund or if you over paid? One of the main challenges of any construction contractor is cash flow, after all cash is king, but what many contractors aren’t aware of are little tax incentives that can yield BIG savings. Three of the most lucrative incentives are: the Section 179D tax deduction, the Research & Development (R&D) tax credit, and the Cost Segregation Study.
How does the 179D deduction work?
The 179D allows a tax deduction of a commercial building’s owner for the reduction of energy and power of lighting, heating and cooling (HVAC), and the building envelope. Once certifications and inspections are completed by a qualified engineer or contractor, and it has been confirmed that there is at least a 50% savings in energy and power costs, a deduction of up to $1.80 per square foot can be applied. If 50% is not met then savings can be broken down as follows:
- 60 cents a square foot for HVAC systems meeting 15% savings
- 60 cents a square foot for lighting systems meeting 25% savings
- 60 cents a square foot for building envelope systems meeting 10% savings
What are the benefits of 179D for architects and engineers?
Since government-building owners do not pay taxes, they are unable to benefit from the 179D incentive. However, the tax incentive may then be passed down to the designers, or those who assist designers, of the energy efficient system being utilized. In order to pass it down, the government entity needs to provide an allocation letter assigning the deduction to the designers/or contractors. The letter must state the name of all parties involved, the cost of the project, the amount of the deduction, and the year of service.
The types of buildings that qualify as government buildings are as follows: government offices, schools, state universities, transportation facilities, post offices, airports, military bases, and courthouses.
The Research and Development (R&D) Credit:
Upon hearing the term “research & development” one may conjure images of work being performed in a laboratory. The research and development (R&D) credit, in this case, is inclusive of day-to-day operations including the development of new or improved products, enhancements to existing products, or the improvement of production processes.
Qualified Research Expenses (QRE) are expenses that are paid by a taxpayer for carrying on a trade or business relating to in-house research. These are amounts paid or incurred for wages, and supplies, and/or amounts paid or incurred to another person for the right to use products in order to perform qualified research.
This past December, with the passing of the PATH (Protecting Americans Against Tax Hikes) Act, the R&D credit became permanent. This credit can also be used against Alternative Minimum Tax (AMT).
What is a Cost Segregation Study?:
One of the most lucrative incentives is a cost segregation study. Simply stated, a cost segregation study allows taxpayers to frontload depreciation expense. The process requires an engineering report that segregates assets into four categories:
- personal property
- land improvements
- building components and
This method should be considered when constructing a new facility, acquiring an existing facility, or renovating an existing facility. The rules are very specific and taxpayers should consult with their accountant before moving forward. A critical step in the cost segregation process is selecting the proper engineering firm to assist with the calculation. Having the proper team in place will help ensure the study is completed within Internal Revenue Service (IRS) guidelines. You may also benefit from performing a study allowing for the correction of missed depreciation in past years.
If you weren’t aware of these tax-saving techniques it’s not too late. You can either amend your existing return, or if you are on an extended deadline you have until September 15th to incorporate these incentives or to participate in a cost seg study.