BY DAVID V. JEAN
WHEN TAX TIME rolls around, contractors often feel like the deck is automatically stacked against them. But the right tax planning strategy helps to ensure the House, in this case the IRS, doesn’t catch you off guard. These tax benefits could help you save a substantial amount of money. Contractors should consider several tax credits and deductions as they build their 2021 tax planning strategies.
Work Opportunity Tax Credit
The work opportunity tax credit (WOTC) is a federal general business tax credit obtainable by employers for hiring employees from certain targeted groups like veterans and supplemental security income recipients. Eligibility is based on pre-screening requirements, and there are credit limitations.
The Consolidated Appropriation Act (CAA) extended the WOTC until December 31, 2025.
Employee Retention Credit
The employee retention credit (ERC) is a tax credit available for eligible employers to claim against qualified wages paid after March 12, 2020, feature Planning for 2021 Taxes: What Contractors Need to Know through September 31, 2021. Eligible employers may claim a refundable tax credit against their share of Social Security tax equal to 50% of qualified wages paid to employees after March 12, 2020, and through December 31, 2020, and 70% of qualified wages paid to employees after December 31, 2020, and through September 31, 2021. Qualified wages for 2021 are limited to $10,000 per employee per calendar quarter, meaning the maximum ERC is $7,000 per employee per quarter.
179D Commercial Buildings Energy-Efficiency Tax Deduction
The 179D tax deduction allows eligible builders to claim a tax deduction for installing certified energy-efficient systems and buildings. The CAA made the deduction for energy-efficient commercial buildings permanent. Generally, a tax deduction of $1.80 per square foot is available to owners or contractors of new or existing buildings who install interior lighting, a building envelope, or HVAC or hot water systems that reduce the related energy and power cost by 50% or more in comparison to the minimum requirements in place.
Research and Development Credit
The federal R&D Tax Credit was established to keep jobs closer to home to promote growth and development with innovative new technologies, designs, and engineering. Most states in the U.S. offer R&D tax credit incentives as well.
The expenses your business acquires to research and develop new ways to run your business may qualify for the research and development (R&D) credit. Construction companies can take advantage of this tax credit for research activities that are new to the world or new only to the company itself. There are no limitations on the expenses that you can claim each year as long as all of the activities and expenses qualify as research and development.
Under the Tax Cuts & Jobs Act, research and development costs would be amortized beginning in 2022.
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David V. Jean, CPA, CCIFP, CExP, is a principal at ARB and the Practice Leader for the firm’s Construction & Real Estate, Succession Planning, Professional Services Firms, and Business Advisory Services Teams. Jean provides specialized tax, financial accounting, and business advisory services primarily to construction, real estate, and manufacturing companies. He is a participant on the NASBP’s Certified Public Accountant Advisory Council. He can be reached at djean@arbcpa.com or 207.772.1981.
Access NASBP Virtual Seminars on this topic here: https://learn.nasbp.org/p/EmployeeRetentionCredit