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Focus on Construction: Tax Deductions Restored

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On December 18, 2015, Congress passed the Protecting Americans from Tax Hikes Act of 2015 or the PATH Act. This law includes several tax breaks that are beneficial to construction companies and homebuilders.
January 7, 2016

On December 18, 2015, Congress passed the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). This law includes several tax breaks that are beneficial to construction companies and homebuilders. While this law benefits the 2015 tax year, it also provides some clarity to 2016 tax planning as well. Previous tax extender bills merely applied a short term patch to many tax savings items. The PATH Act provides taxpayer friendly deductions for a longer horizon. Some items have even been made permanent. Below are highlights of a few issues important to contractors.

Bonus Depreciation and Section 179

The Bonus Depreciation and Section 179 tax breaks that expired in 2014 were restored with the passing of the PATH Act. Bonus Depreciation allows businesses to deduct 50% of the cost to purchase new equipment. Bonus depreciation was extended for five years, though its benefit reduces slightly in the later years. Section 179 allows a taxpayer to deduct the cost of equipment purchased for use in an active business. Both of these tax breaks have limits, thresholds, and restrictions that should be considered before use. Under Section 179 the maximum deduction for most property placed in service in tax years beginning in 2015 cannot be more than $500,000. The threshold for how much can be spent on equipment before your available deductions begin to reduce on a dollar for dollar basis is $2,000,000, making this deduction appealing to small businesses. The increased Section 179 expensing limits were permanently extended.

Research and Experimentation Credit

The research and experimentation credit (R&E) is another tax break renewed as part of the PATH Act, and may be available for certain construction and engineering companies. The R&E credit is a nonrefundable credit that can be claimed against regular tax. Certain qualified expenses including wages and contract research may qualify for the credit. Beginning in 2016, eligible small businesses may claim the credit against alternative minimum tax liability; and in certain circumstances, the credit may be used against a taxpayer’s payroll tax liability. Click here for more detail on the R&E Tax Credits that were made permanent with the passing of the PATH Act.

Section 179D Deduction

The Energy-Efficient Commercial Buildings Deduction is a provision that can be utilized by construction companies performing as the designer of record for government buildings such as schools, courts, city halls, etc. Extended by Congress through 2016, this provision allows a deduction of up to $1.80 per square foot to contractors who design lighting, HVAC, or building envelope systems that reduce the building’s total energy and power cost by 50% or more. A contractor could design any one of the three qualifying building components and be awarded a reduced per square foot deduction. In certain cases, a contractor may amend its tax return to claim this deduction on prior year completed jobs.

For a full summary of the PATH Act, click here.

For more information on how these provisions may benefit you or your company and other tax planning information for construction companies please contact RubinBrown’s Construction Services team.

Readers should not act upon information presented without individual professional consultation.

 

Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.

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