As the construction industry continues a slow recovery, federal tax credits can help make a financial difference for both construction contractors and investors. When evaluating the financial viability of a project, there are three federal tax credits worth considering. The federal Rehabilitation Credit, the Renewable Energy Investment Tax Credit and the Research and Development Credit can provide income tax savings – and improved return on investment.
Federal Rehabilitation Credit
Construction companies can take advantage of the Rehabilitation Credit and the Renewable Energy Investment Tax Credit (discussed below) by participating in the ownership or tax credit equity-investing group of the entity that owns the qualified property.
A federal tax credit is available to individuals and entities for qualified rehabilitation expenditures (QREs) incurred for 1) a qualified building, or 2) a certified historic structure. The amount of the credit is 10% of the QREs with respect to a qualified rehabilitated building, which is generally considered to be a non-historic building built before 1936, and 20% of the QREs related to a certified historic structure. The rehabilitation credit is generally claimed by a taxpayer in the year the building is placed into service in the taxpayer’s business.
QREs are amounts incurred that become part of the depreciable basis of a building. To qualify for the federal tax credit, the building must be used in a business. Rehabilitation includes renovation, restoration or reconstruction of a building, but it does not include an enlargement (an increase in the total volume of the building) or new construction.
In order to qualify as a rehabilitated building, the total expenditures for the renovation, restoration or re-construction must exceed the adjusted tax basis of the building and the building has to be placed in service by a taxpayer before the start of the rehabilitation. In addition, for buildings that are not certified historic structures, the age requirement mentioned above must be satisfied as well as a requirement that 50% to 75% of the external walls and 75% of the internal structural framework be maintained.
A certified historic structure is any building listed in the National Register of Historic Places or located in a registered historic district and certified by the Secretary of the Interior as being of historic significance. The federal credit program is administered by the National Parks Service, and details concerning the application process for the federal program are found on the National ParksService website. A stringent certification process must be followed and it is highly recommended that companies interested in pursuing the federal rehabilitation credit consult with advisors that are familiar with the certification process. Individual states may have rehabilitation credit programs (with similar certification standards) that can be utilized in conjunction with the federal rehabilitation credit.
Renewable Energy Investment Tax Credit
A federal tax credit is available for qualifying geothermal, wind and solar renewable energy property placed into service by the end of 2016. The energy credit percentage is 30% for solar-energy property, hybrid solar-lighting systems, qualified fuel-cell property and qualified small wind-energy property. The energy credit percentage is 10% for stationary microturbine property, geothermal heat pump systems and combined heat and power system property. In addition, rebates and incentives will also likely be available through a taxpayer’s local utility.
Research and Development Credit
The research and development (R&D) credit has not been widely used by construction contractors. In certain instances, contractors may be eligible to claim the credit.