Construction Tax Credits Explained – Section 179D, R&D Tax Credits and More

Tax planning gets complicated for construction companies. After all, you contend with factors like project-based income, fluctuating labor costs and significant equipment investments — all of which make taxes complicated.

But understanding and leveraging the wide range of tax credits available to construction companies can significantly reduce tax liabilities and improve financial stability. This guide explores key tax benefits tailored to the construction industry.

Fuel Tax Credit

The Fuel Tax Credit allows construction companies to reclaim federal excise taxes paid on fuel used for off-highway business activities. This credit applies to various types of fuel used in off-highway operations, including diesel fuel. However, the exact credit amount per gallon can change, so companies should verify the current rates with the IRS.

To claim this credit, businesses must use IRS Form 4136, Credit for Federal Tax Paid on Fuels. This form is filed annually alongside your tax return. If you’d prefer to receive this credit more often, you can file Form 8849, Claim for Refund of Excise Taxes for periodic claims, and Form 720, Quarterly Federal Excise Tax Return, for quarterly credits.

To maximize this credit, construction companies should implement robust fuel tracking systems that separate on-road and off-road fuel usage. Train equipment operators to accurately log fuel consumption and consider bulk fuel purchases for off-road equipment to simplify tracking. While the administrative effort can be substantial, the potential savings often justify the work, especially for large construction companies that consume lots of fuel.

Companies operating across multiple states should know that fuel tax rates and regulations can vary significantly at the state level. Implement a system to track fuel usage by state and be aware of each state’s specific requirements for claiming the credit. This may involve separate reporting for each state where you operate.

The Fuel Tax Credit also applies differently to leased versus owned equipment. For owned equipment, you can claim the credit directly, whereas for leased equipment, the credit typically goes to the lessor. Analyze the total cost of ownership (including tax implications) when deciding whether to lease or buy equipment.

Note that the fuel tax credit has frequently appeared on the IRS’s annual “Dirty Dozen” list of tax scams. This is due to unscrupulous preparers and promoters who encourage taxpayers to claim the credit erroneously. While the credit is legitimate for off-highway business use, it’s crucial to ensure your company truly qualifies before claiming it. Fraudulent claims can result in penalties and increased scrutiny from the IRS.

To maximize your benefits while ensuring compliance, consider working with a trusted tax advisor who specializes in construction industry tax matters, and keep scrupulous records of your fuel consumption.

Energy Efficient Commercial Building Deduction (Section 179D)

The Section 179D deduction incentivizes the construction of energy-efficient commercial buildings. As of 2023, it offers up to $5.65 per square foot for buildings achieving significant energy savings. This deduction has become a permanent part of the tax code, providing long-term planning certainty for construction companies.

To qualify, buildings must demonstrate energy cost savings of at least 25% compared to a reference building meeting ASHRAE Standard 90.1 minimum requirements. Energy savings must be certified by a qualified third party, typically a licensed engineer in the building’s jurisdiction.

Construction firms designing or building commercial structures might consider:

• Collaborating with energy efficiency consultants during the design phase
• Investing in energy modeling software to optimize building performance
• Focusing on improving interior lighting systems, HVAC and building envelope to meet efficiency standards

For companies working on joint ventures or partnerships, it’s crucial to clearly define how the Section 179D deduction will be allocated among the partners. The partnership agreement should specify whether the deduction will be split based on ownership percentages or allocated to the partner responsible for the energy-efficient design and construction.

When operating across multiple states, be aware that some states may have additional energy efficiency incentives that can complement the federal Section 179D deduction. Implement a system to track and manage compliance with both federal and state-level energy efficiency requirements to maximize your tax benefits.

Construction companies can also use this deduction as a competitive advantage when bidding for commercial projects, potentially offering more attractive pricing or higher-quality energy-efficient designs. By incorporating these energy-efficient practices into your construction process, you can not only benefit from tax savings but also position your company as a leader in sustainable building practices.

Residential Energy Efficient Property Credit (45L)

The 45L credit encourages the construction of energy-efficient residential properties. For dwellings constructed and sold or leased after December 31, 2022, the credit amounts are:

• Single-family and manufactured homes: $2,500 for meeting energy-saving requirements, $5,000 for zero-energy ready certification
• Multi-family units: $500 for meeting energy-saving requirements, $1,000 for zero-energy ready certification. For multi-family units, these amounts increase to $2,500 and $5,000 respectively if the construction workers on the project are paid prevailing wages (as determined by the Department of Labor)

To claim this credit, obtain certification from an eligible certifier for each qualifying dwelling unit. Develop standardized energy-efficient designs for different property types and train staff on energy-efficient construction techniques. Building relationships with suppliers of energy-efficient materials and systems can streamline implementation and improve cost-effectiveness.

For companies involved in joint ventures or partnerships for residential developments, establish clear guidelines for how the 45L credit will be allocated. This is particularly important for multi-family projects where the credit can add up to a significant amount.

Use project management software that can track energy-efficient features installed in each unit. This technology can help ensure that all qualifying elements are properly documented, making the certification process smoother and reducing the risk of overlooking potential credits. The credit is claimed in the year the unit is sold or leased for use as a residence. Unused credits can be carried back one year and forward for up to 20 years.

Work Opportunity Tax Credit (WOTC)

The Work Opportunity Tax Credit encourages hiring from groups that have faced employment barriers, including veterans, ex-felons and long-term unemployment recipients.

The credit amount varies based on the target group of the employee and the wages paid during the first year of employment. Generally, the credit is 40% of the first-year wages up to $6,000, for a maximum credit of $2,400 per eligible employee. For certain veteran groups, the wage limit can be higher, allowing for credits up to $9,600. The credit can be claimed for up to two years for some groups.

To claim this credit, submit Form 8850 to your state workforce agency within 28 days of the employee’s start date. Develop relationships with local workforce development agencies and implement a screening process during hiring to identify potentially eligible employees. Maintain detailed records of hours worked and wages paid to eligible employees to support your claim.

Implement HR software that can flag potentially eligible candidates during the hiring process and automatically generate the necessary documentation for WOTC claims. This can help ensure you don’t miss out on credit opportunities and streamline the claiming process.

The WOTC is available for both for-profit and certain non-profit employers. If the credit exceeds the tax liability, it can be carried back one year and forward 20 years, providing flexibility in its utilization.

Research and Development (R&D) Tax Credits

The R&D tax credit supports companies developing new construction techniques, materials, or improving existing processes. The credit can be calculated using two methods:

• Regular credit: Generally 20% of qualified expenses over a base amount
• The Alternative Simplified Credit: 14% of qualified expenses over 50% of the average for the three preceding tax years

To qualify, research activities must:

1. Be technological in nature.
2. Aim to develop a new or improved business component.
3. Involve a process of experimentation.
4. Relate to function, performance, reliability, or quality improvement.

In the construction industry, this might include seemingly-routine activities. Examples include developing new construction techniques, improving energy efficiency, enhancing safety features, testing new materials for durability or experimenting with methods to enhance efficiency.

To maximize this credit, identify and document all activities that may qualify as R&D, including time spent, resources used and specific technical challenges encountered during the process. Keep detailed records of associated costs, including wages, supplies and contract research expenses.

Use project management software that allows you to tag and track potential R&D activities in real time. This can help ensure all qualifying activities are captured and properly documented, making it easier to calculate and substantiate your R&D credit claim.

Companies operating in multiple states should be aware that many states offer their own R&D tax credits in addition to the federal credit. Implement a system to track R&D activities by state to maximize both federal and state-level benefits.

The R&D tax credit is now permanent, providing certainty for long-term planning. Eligible small businesses can also use the credit to offset payroll taxes, making it valuable even for companies not yet profitable.

James Moore: Trustworthy Construction Industry Tax Experts

Effective tax planning is crucial if you want to grow your construction company and maintain its financial health. By strategically applying tax credits and deductions, you can significantly reduce liabilities and improve cash flow. But these can be complicated to apply, making expert guidance a significant asset.

Don’t leave money on the table. At James Moore & Co., our construction industry tax experts can help you navigate these complexities, ensuring you maximize every available tax benefit while maintaining compliance. Contact us today to start building a comprehensive tax strategy review tailored to your construction business.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.