6 Tax Incentives for Construction Companies
The construction industry plays a crucial role in our lives, creating buildings and spaces that provide jobs, shelter and community. Due to the impact the industry has on the economy and our communities, the government provides multiple tax incentives and credits to benefit construction companies. Below are six tax incentives that construction companies may be eligible to utilize.
1. Research & Development (R&D) Tax Credit
The R&D federal tax credit is often overlooked in the construction industry but can benefit companies who create new or improved processes. Activities that qualify need to be new to the business along with being technological in nature, but the activities do not have to be new to the industry. Examples of eligible research activities include experimenting with alternative metals, high-tech equipment installation and energy efficient design and improvement. The federal credit amount could be 5% to 10% of a company’s qualified research expenses (QREs) during a given year.
2. Section 179D Energy Efficiency Deduction
Section 179D, known as the Energy-Efficient Commercial Building Deduction, allows building owners and qualified design professionals (architects, designers, engineers, etc.) to claim a tax deduction for installing qualifying energy efficient systems. The deductions apply to both newly constructed or renovated energy-efficient commercial buildings and multifamily residential buildings that are at least four stories high. The base savings per square foot are calculated as $0.50 for a building with 25% energy savings plus $0.02 per square foot for each percentage point of energy savings above 25%. There is a maximum of $1.00 per square foot for a building with 50% energy savings. If certain prevailing wage and apprenticeship requirements are met the deduction starts at $2.50 per square foot with a $0.10 increase for each additional percentage reduction up to a maximum of $5.00 per square foot.
3. Energy-Efficient Homes Tax Credit
Depending on the type of home, its energy efficiency and the date when the home is acquired, eligible contractors may be able to claim up to $5,000 tax credits per home. Contractors who build or reconstruct new energy-efficient homes and meet the required specifications under IRC Section 45L are eligible for the tax credit.
4. Fuel Tax Credit
The IRS provides a credit for nontaxable uses of fuel. The fuel tax credit allows contractors to claim a dollar-for-dollar deduction of their company’s tax obligation. Common off-highway vehicles and equipment, such as stationary machines, bulldozers and earthmovers, qualify for the Fuel Tax Credit. The credit is calculated by the rate per gallon that is allowed for the type of fuel being used. The tax credits vary for gasoline, diesel and propane. To claim the credit, contractors need to file Form 4136.
5. Qualified Business Income (QBI) Deduction
Construction companies should make sure they are taking full advantage of the qualified business income deduction. The deduction is a maximum of 20% of qualified income earned from a business that is owned directly by an individual taxpayer or through a pass-through entity. Due to limitations on the maximum deduction, companies should consider the impact of paying shareholder bonuses and guaranteed payments versus distributions.
6. Work Opportunity Tax Credit (WOTC)
WOTC is a federal tax credit that has been extended to December 31, 2025, and is available to employers who hire and employ individuals from certain targeted groups who have faced significant barriers to employment. The ten targeted groups who are eligible for the credits are Qualified IV-A recipients, veterans, ex-felons, designated community residents, vocational rehabilitation referrals, qualified summer youth employees, Qualified Supplemental Nutrition Assistance Program (SNAP) benefits recipients, Qualified Supplemental Security Income (SSI) recipients, long-term family assistance recipients and qualified long-term unemployment recipients. Depending on the target group that the individual belongs to, the credit per new hire can range from $2,400 to $9,600.
While each of these tax credits and deductions have their own eligibility requirements, they can be very beneficial for construction companies. If you have any questions regarding tax credits and incentives for the construction industry, please reach out to our Brown Plus Tax Department.