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D

Revisiting

During 2008 and through the early part of 2009, several tax provisions that are significant to the construction industry were created, extended and improved. This article will review some of the highlights from these provisions. Please keep in mind that when considering any of the provisions mentioned, it is always wise to consult with a tax professional first to ensure that your business receives the maximum tax benefit.

The American Recovery & Reinvestment ActThe American Recovery and Reinvestment Tax Act (The Act), passed February 17, 2009, is one of the most highly pub-licized tax acts in recent memory and includes several provi-sions that can be beneficial to construction businesses. Bonus Depreciation. Bonus depreciation is basically a way

for a company to write off new equipment and other qualified

property purchases faster. A provision for bonus depreciation

was included in the Economic Stimulus Act of 2008 and expired

BY ROGER T. GINGERICH, CPA/ABV, CVA

Construction industry provisions been expanded and improved over the past year

Financial advice

tax breaksyour

fEATuRE

This article originally appeared in Builders Exchange— The Magazine, April, 2009. Reprinted with permission. All rights reserved. Copyright 2009. Sabre Publishing, Inc. 398 West Bagley Road, Suite 210, Cleveland, OH 44017

builders exchange magazine | april 2009 24

December 31, 2008. The most recent Act extends that

50% bonus depreciation on new assets placed in service

through 2009, retroactive to January 1, 2009. The Act

also extends the bonus depreciation through 2010 for

property with a recovery period of ten years or more,

transportation equipment and certain aircraft. If you are

considering placing an asset into service within the next

year, the bonus depreciation provision provides a major

incentive to make the purchase before the end of 2009.

An example of how bonus depreciation works: A $500,000 asset is placed into service in 2009; $250,000 may be expensed under Section 179; $250,000 remains to be depreciated; A further $125,000 may be expensed as Bonus Depreciation (50% of $250,000). The asset now has a $125,000 base from which to take standard 1st year deprecia-tion. For this example, we’ll assume 5-year property: $25,000 1st year depreciation. Total deduction in 2008 is $400,000 on the asset; remaining $100,000 cost of the asset is recovered under the otherwise ap-plicable rules for computing depreciation. Net operating loss (NOL) carryback. For com-panies with net operating losses arising in tax years ending after 2007, the Act allows taxpay-ers to carry back these losses for three, four, or five taxable years, rather than the current two taxable years. The provision applies only to busi-nesses with average annual gross receipts of less than $15,000,000 (taking into account the gross receipts of certain related taxpayers) for the three tax year periods ending with the loss year.

This is helpful for taxpayers who may not have had taxable income in the prior two years. Be-cause the carryback period is extended, a refund of taxes already paid can be “received.” The taxpayer makes an irrevocable election to carry back the NOL for three or five years. Taxpayers can and should use the tentative/“quick” carryback procedures by using Form 1139 (corporations) or Form 1045 (individu-als) which expedites the processing of the refund. Refundable credits. The Act extends through the end of 2009 a provision that permitted corpora-tions to monetize some of their older unused alter-native minimum tax and research and development tax credits. Under this provision, a corporation that is eligible for bonus depreciation (discussed in more detail above) may elect instead to claim additional refundable alternative minimum tax or research and development tax credits. The credits are increased by 20% of the difference between depreciation claimed on eligible property with and without bonus depre-

ciation. The amount is limited to the lesser of six percent of the accumulated credits or $30 million.

To determine if monetizing unused AMT and research and development credits is beneficial to a business, a worksheet is available at www.irs.gov. On the IRS site, search for “instruc-tions for form 3800” and then scroll down to Line 18b to find the worksheet. Once the benefit is known, it’s just a matter of doing the math to see which scenario has the best result for the business.

Work Opportunity Tax Credit. The Work Op-

portunity Tax Credit is a federal hiring incentive that

provides tax credits to businesses hiring employees

from “targeted groups.” The Act adds unemployed

veterans and disconnected youth to the list of tar-

geted groups eligible for the Work Opportunity Tax

Credit. This provision applies to individuals who

are hired and begin work in 2009 or 2010.

Other targeted groups eligible for the credit are listed below. Businesses that hire from these groups are eligible to receive a tax credit: Long-term Temporary Assistance to Needy Families (TANF) Recipient, Other TANF Recipi-ent, Qualified Food Stamp Recipient, Designated Community Resident, Summer Youth Employee, Qualified Veteran, Vocational Rehabilitation Re-ferral, Qualified Ex-Felon and SSI Recipient.

S corporation built-in gains tax relief. The S-cor-

porations built-in gains tax applies when a former C-

corporation becomes an S-corporation. “Built-in gains”

are items for which the fair market value exceeded the

basis of such asset when the switch took place. Prior to

the Act, a sale of such assets during the first 10 S-Corpo-

ration years could trigger a corporate level tax.

The Act provides that there is no built-in gains tax imposed for tax years beginning in 2009 or 2010 as long as the seventh tax year of the recognition period precedes the 2009 or 2010 tax years. Therefore, this benefits C corps that converted to S corps in 2002 or 2003.

Energy Policy Act of 2005The Energy Policy Act of 2005 provided deduc-tions for energy efficient commercial buildings which were set to expire at the end of 2008. The Emergency Economic Stabilization Act of 2008 extended these deductions for property placed in service through December 31, 2013.

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The Act allows an immediate depreciation deduction for the owner and/or lessee of a building (similar to bonus depreciation). This deduction can be passed on to the designer of the system in govern-ment-owned buildings. (e.g. architectural, engineer-ing firm, or contractor in a design build situation).

Property that qualifies for the deduction includes: property that is depreciable, property installed in buildings located in the U.S. that are within the scope of ASHRAE Std. 90.1-2001, property that is part of building’s lighting sys-tem, HVAC system and/or building envelope, and property that is certified.

To qualify for the deduction, there must be a certified reduction of total energy and power costs by 50% (with respect to lighting, HVAC, and build-ing envelope) as compared to a “Reference Build-ing” per ASHRAE Std. 90.1-2001. The maximum deduction is $1.80 per sq. ft. for whole building (not to exceed cost of energy efficient property). The par-tial building deduction is up to $.60 per sq. ft. for a 16.67% reduction (1/3 each for lighting, HVAC, and building envelope) of energy and power costs.

There are two important items to consider. First, proactive design is important as the legislation was designed to ensure that “free riders” would be minimal. Secondly, while LEED certification cer-tainly increases the chances of a building qualifying for a deduction, it does not guarantee it.

Qualified Rehabilitation & Low Income Housing Tax Credits The Housing Assistance Tax Act (HATA) which was passed in 2008 remedied two long-time problems that hindered real estate inves-tors’ ability to take advantage of certain tax credits due to the Alternative Minimum Tax (AMT). The AMT combines a broader measure of taxable income (i.e., fewer or less generous deductions or exclusions) with lower marginal rates when compared to “regular” income tax.

Prior to 2008, taxpayers looking to take ad-vantage of the Rehabilitation Tax Credit (typically 10% of rehabilitation costs for buildings placed in service before 1936 and 20% for certified historic structures) often were unable to claim these tax ben-efits because the credit did not offset the AMT. With the passage of the HATA, credits generated from post 2007 qualified rehabilitation expenditures are allowed to offset both regular and AMT taxes.

The Low Income Housing Tax Credit

(LIHTC), which gives incentives for the utiliza-tion of private equity in the development of af-fordable housing aimed at low-income Americans, was also affected in a similar manner. The HATA allows credits attributable to buildings placed in service after December 31, 2007, to no longer be

subjected to the AMT limitations. BXM

Roger T. Gingerich, CPA/ABV, CVA, is a principal

in the Real Estate and Construction Group at Skoda

Minotti, a CPA, business and financial advisory firm

with offices in Cleveland and Akron.

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