Building, expanding or renovating projects are costly and time consuming for any business. Fortunately, federal and state governments offer tax credits and incentives to offset those costs and encourage your business to make improvements or invest in construction projects.
Tax credits and incentives are used by both the federal and state governments to drive economic growth and promote business expansion. Qualifying investments range from the installation of energy efficient appliances to property investments made in certain underserved communities.
If an expanding or renovation project is in your company’s future, here are the top five things to know in advance to help you save money.
Upgrade to green appliances.
Choosing appliances that are better for the environment can reduce your business’s total energy and power cost, and certain improvements can even qualify your business for tax deductions, according to the Bipartisan Budget Act of 2018. Businesses that install energy-efficient interior lighting, building envelopes or green heating, cooling ventilation or hot water systems can qualify for a tax deduction of $1.80 per square foot. If you are planning to renovate or upgrade your appliances, consider going green to increase your company’s cash flow.
Consider expanding into underdeveloped communities.
The New Market Tax Credit (NMTC) Program aims to attract private investment organizations to underserved communities by offering a tax savings opportunity. Businesses can qualify for the NMTC Program by first applying for the Community Development Entity (CDE) certification. If your company expands into a qualified community and participates in the NMTC program, your building and property investments are used to help finance the businesses in low-income communities, and you can generally claim a tax credit equal to 39 percent of the original investment amount over a period of seven years. That’s a win-win situation for your company and the community.
Determine if your new expansion project qualifies for accelerated depreciation.
Businesses that have constructed, purchased, expanded or remodeled their buildings and real estate assets can be eligible to accelerate depreciation deductions and defer federal and state income taxes. Property owners and lessees can save substantially on their taxes and increase their cash flows by conducting a cost segregation study to identify and separate assets that qualify for accelerated depreciation. A cost segregation study dissects the construction cost or purchase price of the property that would otherwise be depreciated over 27 ½ or 39 years. The primary goal of a Cost Segregation study is to identify all property-related costs that can be expensed immediately or depreciated over the course of 5, 7 and 15 years. Conducting a cost segregation study can accelerate depreciation deductions and help companies take advantage of the time value of money.
Rehabilitate a certified historic structure.
If your business is interested in expanding, consider renovating a certified historic structure. Giving new life to a historic building can revitalize a community and help to preserve its history. The Federal Historic Preservation Tax Incentives Program offers tax incentives to private investment companies for the rehabilitation and re-use of certified historic structures. Businesses that invest in the rehabilitation of certified historical, income-producing buildings can be eligible for a 20 percent income tax credit.
Negotiate a little.
Discretionary, or negotiated, incentives are not defined through an existing governmental tax credit program and are up for negotiation. Federal, state and local authorities have the ability to offer negotiated incentives to attract organizations that benefit the community and boost economic development. However, timing is key. If you are planning to relocate, build or expand, it’s crucial that your work with a tax professional who can investigate the incentives available before you announce your move. Keep in mind that if you claim a negotiated tax credit or incentive, it’s a binding contract for both the jurisdiction and your company. That’s why it’s important that you have a tax professional who can offer expertise and recommend best practices.
Could your next building expansion or improvement be funded through tax credits or incentives? Learn more about Warren Averett’s Quali-Finder tool, and begin the process today to uncover your tax savings potential to boost your company’s bottom line or invest in new projects.