As 2019 ended, Congress passed the Taxpayer Certainty and Disaster Tax Relief Act as part of an omnibus spending package, the Further Consolidated Appropriations Act, 2020 to extend business tax credits and deductions that expired on December 31, 2017. Several of the tax incentives extended under the act impact the construction and real estate industries, including:
- The Empowerment Zone Credit package
- The Federal Alternative Fuel Credit
- The Alternative Motor Vehicle Credit
- The Energy-Efficient Homes Credit
- The 179D Commercial Efficiency Property Deduction
- The New Markets Tax Credit
- And the Work Opportunity Credit.
Empowerment Zone Incentives
Up until the end of 2017, Empowerment Zones had been a popular way to encourage businesses to complete work in underprivileged areas. As a result, the number of zones across the U.S. had steadily increased to over forty. Under the 2019 legislation, these zones were reestablished retroactively to 2018 through 2020. The Empowerment Zone credit package includes up to a $3,000 credit for each employee who lives in a zone, an extra $35,000 of accelerated depreciation deduction for qualified property under Section 179, the potential for tax-exempt bond financing and the deferral of certain capital gains on qualified equipment sold and replaced.
Amended returns are required for 2018 and 2019, including the requisite information reported on Form 8844 for employee wage deductions and Form 4562 for the added Section 179 depreciation deduction.
Federal Alternative Fuel Credit
A second credit particularly beneficial to the construction industry is the Federal Alternative Fuel Credit, which was reinstated for 2018 through 2020. This credit allows an applicant to claim a refundable income tax credit of $0.50 per gallon from taxable alternative fuels or diesels used or sold for use in motor vehicles. Alternative fuels include propane, natural gas, liquefied hydrogen, liquid fuel derived from coal through the Fischer-Tropsch process, liquid hydrocarbons derived from biomass and P-Series fuels. Biodiesel, ethanol and renewable diesel are not considered alternative fuels. Unlike the other extended credits, the Federal Alternative Fuel Credit is not claimed by amending previous tax returns. Instead, claimants file Form 8849, Claim for Refund of Excise Taxes, for both the 2018 and 2019 years. This form will only be accepted until August 11, 2020 for purposes of the retroactive claims and is strictly a one-time submission form.
Alternative Motor Vehicle Credit
The Alternative Motor Vehicle Credit is a somewhat overlooked but potentially very lucrative way to get a solid tax benefit, which has been extended through 2020 and retroactively through 2018 and 2019. This credit can be claimed in the year a vehicle defined as a qualified fuel cell vehicle is purchased by the taxpayer for personal or business use. To determine the amount of the credit, check with the manufacturer of the vehicle. The IRS certifies each vehicle as qualified and designates a certain amount of credit for each individual make of vehicle. To retroactively claim this, a Form 8910 should be filed with the amended tax return for the appropriate year.
Energy-Efficient Homes Credit
While not very large, this credit can provide a benefit to contractors engaged in the business of building new homes. The credit provides a $1,000 or $2,000 benefit for contractors who sell or lease a qualified new energy efficient home in the year of sale. The amount of credit available to the contractor depends on the energy efficiency of the home. Form 8908 is used to claim this credit and should be filed with an amended 2018 or 2019 returns for a retroactive claim.
Section 179D Energy-Efficient Commercial Property Deduction
Technically this piece of tax savings legislation is a deduction not a tax credit, but it is probably one of the best extended tax provisions of the 2020 budget. Essentially, this deduction provides a tax benefit for installing energy efficient equipment in buildings such as heating systems, air conditioning units or light fixtures. If the building is commercial in nature, the owner of the building takes the tax benefit; but if it is a government or public building, the contractor receives the deduction. The calculations for this benefit are different than most construction related deductions, since they are calculated on a combination of square footage of the upgraded building and the quality of the upgrades. To retroactively apply this deduction to 2018 and 2019, amended returns are required.
New Markets Tax Credit
A New Markets Tax Credit (NMTC) is available to individual and corporate taxpayers equal to 30% of the capital invested in a qualified community development entity (CDE), a for-profit or not-for-profit entity that must loan or invest substantially all of the capital in qualified businesses operating in low-income communities. This incentive, set to expire as of December 31, 2019, was extended through 2020. The act provides a $5 billion NTMC allocation for 2020 and extends for one year, through 2025, the carryover period for unused NMTCs. Real estate developers can benefit greatly from low-interest loans from a CDE, which can cover funding gaps for development projects in low-income communities.
Work Opportunity Credit
Unlike the other credits, the Work Opportunity Credit was not discontinued in 2017 and is simply being extended for another year until the end of 2020. This credit incentivizes hiring workers from a certain list of targeted groups and allows the employer a credit for a certain percentage of the employees’ first and second-year wages. This credit is taken on Form 5884. It is important to note that for employees to qualify for this program, the employer must register them with the state usually before the employee starts work.
The 2019 legislation has provided businesses, especially those in the construction and real estate industries, with several incentives to explore. Most tax professionals expect 2020 to be an especially big year for amended returns, which potentially means an even bigger year for tax refunds. Please contact your Sikich tax advisor to discuss which of these incentives applies to your business.