Navigating Construction Tax Incentives
Construction is one of the most complex industries, with a wide variety of projects, professionals, problem-solving and performance metrics. With the rapid-fire pace of work and pressure to increase traditionally tight profit margins, sometimes things can slip through the cracks — including opportunities to add to companies’ own bottom lines through tax incentives.
The construction tax landscape, however, can be a daunting task to master. From new rules and regulations to making sense of a number of federal and state tax incentives that contractors can take advantage of, getting out ahead of tax issues can be a critical cog to contractors’ continued success into 2019 and beyond.
Assessing the Tax Landscape
In a recent Viewpoint Tax Symposium for construction professionals, Eve Dreyfus, Tax Partner with Moss Adams, LLP broke down new tax measures that are impacting construction companies. Under the Tax Cuts & Jobs Act, a new 21 percent flat tax rate on C-Corps essentially replaces many former tax provisions and incentives that had been removed in favor of a simpler tax structure for corporations. New pass-through income rules providing a 20 percent taxable income deduction for owners of certain pass-through entities, modifications to like-kind exchange provisions that limit them only to real property, and limits on losses and limits on fringe/entertainment benefits for business purposes, which used to allow for up to 50 percent deductions, were among other key changes she noted.
Dreyfus said construction firms should plan ahead for future downturns by maximizing tax advantages today and investing in areas that will help their businesses, including modern construction technology, building in Qualified Opportunity Zones and paying down debt.
“Generally, contractors win big and lose big, so when there is a loss, not being prepared or not having some of these tax tools to pull from could make things hard for them,” Dreyfuss said.
At the same event, Brady Bryan, CEO and BBA, JD, CQIA of BRAYN Consulting walked attendees through tax incentives like R&D and 179D tax credits that many contractors haven’t traditionally taken advantage of in the past. These benefits, Bryan said, can save contractors tens to hundreds of thousands of dollars each year.
With the new tax rates, the R&D credits are as much as five times more powerful than traditional deductions for C-Corps, thanks to the 21 percent tax rate. Meanwhile S-Corps and partnerships also see a boost with a net credit increase of up to 21 percent. To qualify, a process, design or project needs to be significantly new or improved, technical in nature and has to be unproven or experimental.
Examples of qualified activities cut a wide swath and include new forms of preconstruction planning, new means and methods of development, value engineering, BIM, innovative crane plans, new job specific equipment, sub-system coordination and certain forms of electrical detailing.
“The key is documentation,” Bryan said. “There has to be good project or procedural documentation to support the innovation, showing the efforts to new research and design initiatives.”
Training and Ongoing Education Incentives
In an August 2018 report, The Aspen Institute noted what it called an alarming trend: a steady decline in the amount American employers are investing in their workforce. From 1996 to 2008, the percentage of workers receiving employer-sponsored or on-the-job training fell 42 percent and 36 percent, respectively.
The Aspen Institute proposed a new tax credit called “The Worker Training Tax Credit.” A proposed business tax credit, it would offset a portion of the cost of new training activities for non-highly compensated workers. The credit would mirror the policy design of the current R&D Tax Credit. Businesses would establish a base expenditure level for qualified training expenses, which would be determined by averaging the amounts spent in each of the three years prior to the current tax year. The value of the tax credit would be 20 percent of the difference between the current year qualified training expenditure and the base expenditure level. The credit would only cover training for non-highly compensated workers (less than $120,000 per year), the standard currently used in the Internal Revenue Code.
On a state and provincial level, a number of new incentive programs have been put in place to spur ongoing training and education among workforces. Here are what just a handful of these programs look like:
New York — The Employee Training Incentive Program is a tax credit available to New York State employers who are participants in the program. The credit is equal to 50 percent of the eligible training costs, up to $10,000 per employee and 50 percent of the stipend paid to an intern (up to $3,000 per intern).
Connecticut — The state’s Human Capital Investment Tax Credit is equal to 5% of the amount paid or incurred by the corporation for a human capital investment. Those include in-state training or education, worker education programs, donations or capital contributions to higher learning institutions in Connecticut, child care subsidies paid to employees and contributions to the states Development Account Reserve Fund.
Arizona — The Arizona Job Training Program is a job-specific reimbursable grant program that supports the design and delivery of customized training plans for employers creating net new jobs in the state. Under a “net new” grant, an employer creating net new jobs can apply for a grant to receive up to 75% of their eligible training expenses reimbursed.
Georgia — Among the numerous employee hiring and training programs offered by the state, Georgia businesses can offset their investment in retraining employees to use new equipment or learn new skills through a retraining tax credit. The credit equals 50 percent of direct training expenses, up to $500 credit per full-time employee, per training program.
Rhode Island — Rhode Island provides a Job Training Tax Credit for employers that hire an apprentice in a variety of specialty trades. Employers can be eligible for a tax credit of 50% of actual wages or $4,800, whichever is less per apprentice. The apprentice must be enrolled in a registered, qualified program through the state’s Department of Labor and Training’s State Apprenticeship Council.
Virginia — The state’s Worker Retraining Tax Credit provides up to 30% of the costs of providing eligible worker retraining to qualified workers. The program also provides 35% of the direct costs of providing manufacturing training or instruction to middle and high school students.
Ontario, Canada – The Canada-Ontario Job Grant provides direct financial support for employers who invest in training for their workforce. The grant can cover up to CAD$10,000 of training cost, provided the training meets certain standards.
Tax Incentives to Spur More Canadian Construction Investments
In an effort to fuel more infrastructure and commercial building throughout Canada, Finance Minister Bill Morneau proposed a tax and incentive plan that would allow Canada to better compete with the United States in the wake of the sweeping tax and regulatory changes.
Among the biggest proposed changes: tax measures that would allow businesses to immediately write off the full cost of some types of machinery and equipment and allow companies of all sizes and in all sectors to expense a larger share of newly acquired assets. This move would bring a huge benefit to Canadian construction firms, which, like most contractors, count their fleets of equipment as their biggest capital expenses.
The Canadian Construction Association has lauded the proposal, similar to legislation it has long been advocating for. The organization said it would allow contractors to free up capital and invest in other areas such as technology and continuing innovation.
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