Inflation rates are rising rapidly, and so are the anxiety levels of business owners.
For construction businesses, inflationary pressures are compounding the existing challenges of labor shortages, supply chain disruptions, and material cost increases. That means having to squeeze every last drop out of their budget.
Taking advantage of tax incentives can help construction companies offset inflation and keep their budgets in check. There’s a broad range of incentives, varying from deductions for green building practices to credits for developing industry innovations. Here’s a guide to some of the top incentives for construction companies.
Incentives for energy-efficient construction practices can help contractors get some tax relief. Some of these deductions are part of the Energy Policy Act of 2005, or EPACT, and are not as well known. Although initially intended as temporary, several EPACT provisions have received multiple extensions, and some have become permanent. The EPACT incentives include:
- Energy Efficient Commercial Buildings Deduction (179D): Builders, architects, engineers, and owners of energy-efficient properties can qualify for a deduction of up to $1.80 per square foot. Newly constructed or renovated commercial buildings, government-owned buildings, and multifamily properties can qualify if their energy consumption is 50% or less than a standard U.S. building designed to ASHRAE 90.1 standards.
- New Energy Efficient Home Credit (45L): Although this credit expired in 2001, eligible contractors and developers can still claim it by amending prior-year returns. The credit applies to newly constructed or substantially renovated residential properties of three stories or less, as long as they exceed efficiency standards. Those who qualify can receive a credit of $2,000 for each energy-efficient property in the year it is sold or leased as a residence.
R&D Incentive Programs
Tech companies and scientists are not the only ones conducting research and development.
Construction companies, engineers, designers, and manufacturers may overlook that some of their day-to-day industry practices can qualify for significant R&D tax credits. Industry professionals put a lot of work into developing and exploring new construction techniques, uses for different materials, system designs, tech applications, and sustainability initiatives. All of these practices fall under the umbrella of R&D. Firms can qualify for federal credits of up to 12%. And in addition to federal R&D deductions, many states offer their own tax incentives that contractors can use to lower their tax bill even more.
To qualify, projects need to meet all the criteria of a four-part test:
- Permitted purposes: The project must develop a new or improved business component, meaning any product, process, computer software, technique, formula or invention that the company would sell, lease, license or use in business.
- Elimination of uncertainty: The project would discover information to eliminate technical uncertainty concerning the development or improvement of a product or process.
- Process of experimentation: All of the project’s activities must be part of a process of experimentation for a qualified purpose.
- Technical in nature: The purpose of the research must be to discover technical information. In construction, this would generally be in engineering.
Work Opportunity Tax Credit
Businesses that hire workers in targeted groups that have consistently faced significant barriers to employment can receive credits ranging from $2,400 to $9,600 per qualified employee. Employees in these groups include:
- Formerly incarcerated individuals
• Supplemental Nutrition Assistance Program (SNAP) benefits recipients
- Supplemental Security Income (SSI) recipients
- Long-term unemployment benefits recipients
- IV-A Recipients: a member of a family receiving Temporary Assistance to Needy Families (TANF) benefits
- Long-term family assistance recipients
- Other groups identified by the IRS
Disabled Access Credit
This incentive provides a credit of up to $5,000 for small businesses that pay for accommodations that provide access for individuals with disabilities. Businesses are eligible if they earn $1 million or less and have fewer than 30 full-time employees.
Barrier Removal Tax Deduction
This deduction allows for up to $15,000 in annual deductions for businesses that remove common barriers that prevent accessibility to buildings and vehicles for people with disabilities. Examples include adding ramps to work vehicles or widening doors in an office building.
Other Common Deductions
Along with niche and specialized deductions for construction companies and small businesses, remember to take advantage of the more common ones, too. The IRS offers deductions for:
- Tools and equipment purchased in a year
- Safety gear and uniforms
- Licensing fees
- Union dues
- Legal fees
- Technology and electronics
- Subscriptions to trade journals
- Work travel
- Trade school tuition
- Self-employment tax
- Advertising and marketing
- Subcontractor labor hours
- Depreciation costs
When inflation is chipping away at the bottom line, having access to so many tax incentives can offer tremendous relief for construction companies. But tax code is complicated, and it can be overwhelming to determine which incentives apply to your company. Our team of tax professionals is here to help you make the most of these tax savings opportunities.