When business planning be sure to take a hard look at incentives and credits available! Business planning should include a careful review of tax strategies for any possible loopholes to reduce the burden they will owe next year. Fortunately, the tax code provides several incentives for businesses and building owners, ranging from credits for hiring certain employees to deductions for installing energy efficient upgrades. When applied correctly, these lucrative provisions may potentially add hundreds of thousands of dollars to taxpayers’ bottom lines.
Designed to incentivize sustainable building in the public and private sectors, §179D permits a tax deduction of up to $1.80 per square foot for energy-efficient upgrades to both existing buildings and new construction. Specifically, the possible maximum deduction is $.60 for lighting, $.60 for HVAC systems, and $.60 for building envelope when those systems exceed ASHRAE Standard 90.1-2001 by certain percentages. Typically, the building owner takes the deduction, but in the case of public buildings owned by local, state, or federal governments, the deduction may be allocated to the designer, such as the architect or engineer, that designed the improvements. Designers must seek certification from third party firms to ensure that their projects qualify for §179D.
With its $1.80 per square foot tax deduction, §179D may represent significant savings for building owners and designers of energy-efficient upgrades. For example, Capital Review Group had one client that received a deduction of over $516,000 for retrofits to its 287,000 square foot auto dealership. The improvements, which included the installation of a new HVAC system, solar skylights, and LED lights, significantly enhanced both the customer experience and the building owner’s bottom line. Another CRG client, a large architectural firm, amassed nearly $7,000,000 in deductions over five years after it designed sustainable upgrades for several government buildings.
Cost segregation is a strategy that allows taxpayers to reclassify certain real property assets into tangible personal property, resulting in accelerated depreciation deductions and simplified write-offs for assets that have become obsolete. The strategy is available to taxpayers that have constructed or purchased a building during the year.
Although it is recommended that taxpayers pay for an engineering study to ensure that cost segregation is properly applied, the ROI may be tremendous. Capital Review Group performed an engineering study for a prosperous hotel with a tax burden that reflected its success. The cost segregation process reclassified traditionally 39-year property as either 5, 7, or 15-year property based on specific IRS guidelines. Consequently, the hotel owners were able to reclassify 29 percent of the hotel assets, saving them an estimated $700,000 in taxes over a five-year period.
The tangible property regulations detailed in §263(a) affect all taxpayers that acquire, produce, or improve tangible property, such as buildings or equipment. The regulations permit taxpayers to expense certain items capitalized as improvements in previous years, enabling them to claim additional deductions and losses. When applied properly, the tangible property regulations may save businesses hundreds of thousands of dollars. One of CRG’s clients, the owner of a 240,000 square foot office building, received over $540,000 in deductions for replacing windows.
The R&D Tax Credit rewards businesses for engaging in qualified research as defined by a four-part test outlined in §41. Many businesses, particularly those that are small or medium in size, wrongly assume that they do not qualify. In reality, the credit cumulatively saves businesses billions of dollars each year for engaging in some of their routine activities. Architecture and engineering firms often underutilize the credit because they do not realize that many of their regular business activities constitute qualified research. For example, architects may claim the R&D Tax Credit for developing designs for clients, as long as the designs are not purely aesthetic. For civil engineers, examples of qualifying activities include bridge and roadway design, foundation and earthwork design for unique site conditions, and design of renewable energy infrastructure. For structural engineers, qualifying activities may include the determination of alternative structural designs, CAD modeling, and environmental, sustainable, or special use design. Most states offer some type of incentive for R&D in addition to the federal credit.
Designed to rectify a high unemployment rate among certain groups of job-seekers, including veterans, WOTC saves businesses up to $9,000 for each new hire from a target group. The specific amount is based upon the group from which the employee is hired and the number of hours the employee works in his or her first year. A list describing the target groups and specific requirements may be found at the U.S. Department of Labor’s website (http://www.doleta.gov/business/incentives/opptax/eligible.cfm). The credit applies to businesses of all sizes and there is no limit to the number of new employees that may qualify, so it may represent a substantial tax savings particularly for businesses undergoing a large expansion.
Due to the complexity of sales and use tax laws, overpayment is a common error for businesses that might miss an exemption or apply the incorrect tax rate. Consulting with tax professionals may help businesses avoid the costly pitfalls of sales and use taxes.
Some of these incentives, including the R&D Tax Credit and WOTC, are part of a group collectively known as tax extenders. These provisions expired at the end of 2014, but are typically renewed retroactively each year. Therefore, taxpayers should continue to consider them in their tax planning strategies while keeping abreast of Congressional plans for renewal.
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