Overview of Business Tax Extenders that Impact Real Estate Entities
The Consolidated Appropriations Act, 2021, was signed by the President on December 27, 2020. The legislation provides 900 billion dollars of stimulus relief for the COVID-19 pandemic and 1.4 trillion dollars in appropriations for the 2021 fiscal year. The bill consists of over 5,500 pages and far exceeds the spending provisions of the 2.2 trillion dollar CARES Act, enacted in March 2020. Some of the most significant changes for real estate and construction businesses are highlighted below.
Section 45L Tax Credit for Homebuilders
The Section 45L tax credit for building energy-efficient homes has been extended for one year. It was set to expire December 31, 2020. The tax credit can now be claimed on homes built and delivered by December 31, 2021.
An eligible construction contractor can claim a credit for each qualified new energy-efficient home sold or leased to another person during the tax year for use as a residence. The Section 45L tax credit (either $1,000 or $2,000) is based on the energy-saving requirements of the home and is part of the general business credit. The credit is calculated on the Form 8908 – Energy Efficient Home Credit, and on Form 3800 – General Business Credit. The credit is not allowed against the tentative minimum tax.
Section 179D Deduction for Energy-Efficient Commercial Buildings
The Section 179D deduction for energy-efficient commercial buildings has been made permanent.
Section 179D is an upfront deduction of costs that is obtained by performing energy-efficient construction or improvements to commercial buildings that reduce total annual energy or power costs by 50 percent. This would include, but not limited to, heating, cooling, ventilation, hot water, and interior lighting systems. The IRS requires the systems to have a qualified, third-party inspection and testing to be performed. The original deduction was calculated by using square footage of the property, with a maximum deduction of $1.80 per square foot (HVA: $.60 per square foot, interior lighting: $.60 per square foot, and building envelope: $.60 per square foot). A partial deduction is available for lighting starting with a 25% reduction in annual costs.
Commercial building owners and in some circumstances the primary designer (architect, engineer, contractor, etc.) can benefit from a huge deduction when applicable and receive similar benefits to cost segregation studies. Section 179D often requires its own study of the building.
Section 48 Energy Investment Tax Credit
The energy investment tax credit (ITC) for solar and residential energy-efficient property has been extended for two years. The tax credit can now be claimed through December 31, 2022.
The credit is calculated as the energy percentage (30 percent or 10 percent, depending on the energy source) multiplied by the basis of the energy property when it is placed in service.
In order to qualify for the ITC, the taxpayer must complete the construction, reconstruction or assembly of the property or acquire the property for original use; and depreciation or amortization must be allowed on the property. In addition, the basis of the property must be reduced by 50 percent of the amount of the credit.
This credit will continue to support growth in the solar and renewable energy industries.
There are many other provisions contained within this new legislation and your Keiter team is working to disseminate this information as quickly as possible. If you have questions about these specific tax extenders for your business, please reach out to your Keiter Opportunity Advisor, Email or Call: 804.747.0000. We are here to help.
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.