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5 Tax Incentives for Construction Contractors

11 minute read

The construction industry is one of the most vital industries because it creates buildings and spaces that connect communities, provide jobs, and improve society. Because of their diligent and important work, the government provides various tax incentives to benefit them. Below are five tax incentives that construction contractors may be eligible for.

1. R&D Tax Credit

Many construction contractors are unaware that they may qualify for the Research and Development (R&D) Tax Credit. A common misconception is that construction contractors do not qualify for the R&D Tax Credit because their expenses/activities are not “innovative” enough to qualify for the R&D Tax Credit. However, the R&D Tax Credit is worth looking into because some of the work being done may very well qualify. 

The R&D Tax Credit is beneficial because it offsets a businesses’ payroll and/or income tax liability on a dollar-for-dollar basis, allowing businesses to recoup a portion of their R&D expenses. To be eligible for the R&D Tax Credit, their activities and corresponding expenses must qualify. To do this, the activities must pass the Four Part Test and the expenses have to be Qualified Research Expenses. For a more in-depth overview of the R&D Tax Credit and eligibility requirements, click here. 

The determination of whether expenses qualify is fact-specific, but the following are some activities in the construction industry that may qualify for the R&D Tax Credit:

  • The development of solutions or processes that reduce time on the construction site;
  • The development of new materials or techniques for a specific construction project;
  • The use of new materials or a new process for a project that has not been attempted due to technological risks; and
  • The design and implementation of alternative systems to improve efficiency at the construction site.

These are just a few, of many, examples about what expenses the construction industry may qualify for the R&D Tax Credit. To ensure your expenses qualify for the R&D Tax Credit, reach out to Corvee to see how we can help!

2. Depreciation Deductions

One of the most well-known tax incentives are depreciation deductions permitted under §179 and §168(k) of the Internal Revenue Code. Generally, assets are expensed over the course of the useful life of the property. Section 179 and §168(k) are unique in that a percentage or all of the depreciation may be taken in the first year. Both of these provisions require the property to be Qualified Property – tangible personal property that is purchased for use in a trade or business that includes all property (other than land) that can be moved or touched. Equipment, supplies, and vehicles are common examples of Qualified Property. 

While both of these provisions provide depreciation deductions, there are some key differences such as eligibility, permanency, and other distinctions. When applying these depreciation provisions, taxpayers must first apply §179, then apply §168(k) above the limitations that §179 imposes. A brief overview of each section is provided below.

Section 179 is a permanent provision that permits the immediate expense of property with a useful life of 20 years or greater. Unlike bonus depreciation, deductions may be taken for property that is new to the taxpayer but has previously been used by another. 

The deduction is limited to $1,080,000 and the amount of property that can be purchased is $2,700,000. If total purchases exceed $2,700,000 the deduction decreases dollar for dollar, reaching zero once $3,780,000 of property is purchased. The deduction, however, can only be applied up to the tax liability of the taxpayer. 

Section 168(k) is the product of the 2017 Tax Cuts and Jobs Act and will begin to phase out in 2023 and ultimately terminate in 2027. Section 168(k) works along §179 because it allows for immediate expense. Section 168(k) is referenced as a “bonus” depreciation because it permits businesses to fully deduct qualified property in excess of the $1,080,000 limitation in §179. Unlike §179, there is not a business income limitation so a business could take a net loss by taking advantage of bonus depreciation.

Depreciation deductions are of most use to construction contractors because they permit deferment of tax liabilities for capital intensive assets, such as machinery and vehicles. While both §179 and §168(k) provisions are useful, determining which to use can be a tricky matter. 

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3. Section 179D Energy Efficiency Deduction

Section 179D provides a credit for the owners of energy saving commercial buildings. The creation or improvement of the commercial building must satisfy certain energy reduction requirements and focus on the building’s envelope, HVAC system, or lights. The owners of the commercial building are generally the taxpayers who can claim the deduction. However, tax-exempt organizations can allow the person primarily responsible for designing the property to take the deduction instead. 

The deduction is calculated depending on the percentage by which the energy consumption was reduced. $1.80 per square foot is allowed where the improvements reduce the consumption by at least 50%. Improvements that reduce the consumption by less than 50% are permitted up to $1.20 per square foot. 

A study by a qualified third party is necessary to determine the applicable percentage. The third party will utilize IRS-approved software to model the energy performance and compare the building to that of a reference building. In addition, the third party will make a physical site visit and verify the improvements meet the applicable energy-savings thresholds. If all requirements are met, the third party will provide the relevant certification needed  to claim the deduction. 

To qualify for this deduction, contractors must be responsible for the building designs. A contractor that only installs, repairs, or maintains a property does not meet the definition of a designer for the purposes of this deduction. However, if the contractor has input in the design or is  obligated to participate in the design based on their contract terms, they may qualify for the 179D deduction.

While this deduction may not be applicable to all projects a contractor may handle, contractors should be mindful of this deduction when contracting with tax-exempt organizations. If the construction or improvement is pursuant to a design-build contract, the §179D deduction may be available. 

4. Work Opportunity Tax Credits

Another credit that may be available to contractors is the Work Opportunity Tax Credit. The government provides this credit to employers who hire individuals from certain targeted groups who have faced significant barriers to employment. Some of the targeted groups include:

  • Certain qualified veterans;
  • Qualified SNAP/TANF Recipients;
  • Ex-felons;
  • Supplemental Security Income Recipients; and
  • Long-term unemployed.

To qualify for this credit, the employee must have been hired in the tax year, be a member of one of the ten targeted groups, and have worked a total of at least 400 hours. The credit is 40% of up to $6,000 in earned wages by the employee, so the maximum credit is $2,400 per employee. For employees who do not satisfy the 400 hour requirement, but have worked at least 120 hours, a 25% rate may be applied. Employers can only use the credit to the extent of their tax liability. However, unused credits may be carried back one year or carried forward 20 years.

5. Fuel Tax Credits

While all gasoline (with a few exceptions) is taxed, the government provides a credit for nontaxable uses of gas. One such use is the use of fuel for business purposes in a vehicle that is not registered for highway use. Equipment such as stationary machines, bulldozers, and earthmovers are common off-highway vehicles whose use qualifies for the Fuel Tax Credit. The credit is calculated by the rate per gallon that is allowed for the type of fuel being used. To claim the Fuel Tax Credit, a contractor simply has to fill out and file Form 4136 with the IRS.

Conclusion

These five tax incentives can be very beneficial for construction contractors. Each of these credits and/or deductions has its own eligibility requirements. Because of the complexity, it is a good idea to utilize expert advice and tools to identify which of these incentives your business may qualify for. 

Corvee has just the tools that can help! Reach out to us today to see how our tax planning software can help optimize your taxes.

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