Nicholas L. Shires, CPA, Dannible & McKee, LLP
Nicholas L. Shires, CPA is a tax partner at Dannible & McKee, LLP. Nick has over 16 years of experience providing tax and consulting services to a wide range of clients, including individuals and privately held companies. If you have questions for Nick regarding the green building tax incentives reviewed in this article, feel free to contact him at firstname.lastname@example.org or 315-472-9127
Sustainable design and construction of green buildings can be a costly endeavor for those looking to make a long-term investment. As sustainable design gained prominence over the past decade, the Federal government and most state governments have offered financial incentives to entice builders, owners, designers, and developers to make the initial investment. Those that are not taking advantage of the credits, deductions and rebates below are putting themselves at a competitive disadvantage.
In Part I of this series, we will highlight the incentives that are available under the current tax code. Clean energy is a major focus of President Biden’s proposed legislative changes, and there are substantial tax incentives included in the proposals. We will discuss those in Part II.
- Research & Development Credits (R&D)
Companies in the construction and design industries can benefit substantially from the R&D credit. This credit may be available if the company invests in activities which develop or enhance projects or processes through experimentation, which is not limited to the traditional lab setting everyone associates with the term Research and Development. Investments into green building design, designing energy efficient utility or HVAC systems, and LEED certification are among some of the qualified opportunities that companies may invest in to reap the benefits of the credit.
- Business and Residential Energy Credits
The revised residential energy credits apply to a more limited list of qualified property. For tax years beginning after December 31, 2017, qualified property consists of solar, wind, geothermal, and fuel-cell technology. The credit is equal to 30% of the cost of the investment in the qualified property. This credit has begun to phase out, as scheduled. For 2020-2022, the applicable credit rate is 26%.
- Investment Tax Credit
The investment tax credit is a credit available to construction companies for installing solar energy systems in their commercial properties and residential property for individuals. The credit for the 2020 tax year is 26% of the amount of the investment in eligible solar property.
- Accelerated Depreciation Expense
The Tax Cuts and Jobs Act extended bonus depreciation and increased the amount of the deduction from 50% to 100% of cost on qualified property through 2022. The deduction phases down to 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. Qualified property includes machinery and equipment. An oversight of the Tax Cuts and Jobs Act was that certain non-residential improvement property no longer qualifies for bonus depreciation as it had been in the past under the 50% bonus depreciation rules. However, this was corrected with later legislation, and now qualified improvement property qualifies for 100% bonus depreciation.
- Section 179D Expense
The Section 179D expense has been a valuable deduction for construction and design firms, allowing a deduction of up to $1.80 per square foot for installation of energy efficient property. Although this deduction has historically been temporary in nature and expired for tax years after December 31, 2017. Congress retroactively extended this deduction to tax years 2018 – 2020. More recently, on December 27, 2020, the Consolidated Appropriations Act (CAA) made the Section 179D deduction a permanent provision.
While green building certainly comes at a cost over traditional construction methods, the above tax incentives can help to mitigate those increased costs. The best way to ensure your construction company is availing itself of all credits and tax deductions is to contact a tax professional that is well versed in the specialized industry of green building.
Part II of this series will be available in the Fall 2021 Edition of Going Green.