2020 Tax Opportunities for Construction Companies

Heading into the second half of 2020, the construction industry is bracing for slow growth and continued business disruption. Contractors are looking at lower revenues, tighter profit margins, project delays and cancellations, and potential workforce shortages as COVID-19 fluctuates. Yet, industry confidence for a rebound later in 2020 remains cautiously optimistic; construction is an essential industry, after all, and many have been able to adjust to comply with changing regulations. In the normal course of business, getting the most profit out of every dollar is important, but in the COVID-19 economy it has taken on much greater significance. Now, the viability of the business depends on how effectively companies maximize cash and minimize financial risk. The good news is there are several new and renewed tax opportunities including expanded bonus depreciation, NOL carrybacks, Section 179d, and other incentives available to qualifying taxpayers. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

Section 179D Extended for 2018, 2019, and 2020

Section 179D, the popular tax deduction for writing off energy-efficient building construction and design, expired at the end of 2017. Then, at the end of 2019, Section 179D was re-enacted. This was excellent news for contractors, especially since the deduction was made retroactive for all of 2018, 2019, and 2020. It is a source of immediate cash flow, which means contractors should be looking not just at current year projects for eligibility, but also past projects since January 1, 2018. Qualified improvements can translate into an infusion of cash at a time when it is most needed.

Section 179D applies to eligible improvements to new or existing facilities for the installation of:

• HVAC systems
  • Examples: installing or retrofitting an HVAC system, insulation, digital thermostats, window shading, heat pumps, and solar heating
• Building envelope
  • Examples: insulation, metal insulated panels, window glazing, green roof systems, and using environmentally friendly raw materials
• Interior lighting
  • Examples: daylighting, LED bulbs, occupancy sensors, dimmer switches, and soft-start electronic ballasts

The qualifying energy-efficient installation must reduce the building’s energy usage by at least 50 percent for the full deduction of up to $1.80 per square foot. It’s important to note that partial deductions are also available.

QIP Error Fixed to Allow for Bonus Depreciation

The Tax Cuts and Jobs Act of 2017 contained a drafting error preventing qualified improvement property (QIP) – any improvement to a building’s interior – from taking bonus depreciation. The error impacted any nonresidential building, including qualified leasehold and restaurant improvements. This error cost construction and real estate businesses money on otherwise qualified projects. Now, thanks to the CARES Act, that error has been corrected.

QIP was made retroactive to 2018 and is now recognized as 15-year property, instead of the standard 39-year property. This change makes QIP eligible for bonus depreciation, which is another way that construction contractors can boost immediate cash flow.

Not all states immediately conform to QIP changes, and contractors that previously elected to opt-out of the business interest deduction limitation cannot take bonus depreciation on QIP unless the IRS or Congress makes further clarifications to the law.

NOL Carrybacks Restored to 2018, 2019, and 2020

The CARES Act also amended the rules for Net Operating Losses (NOLs) to allow for a longer carryback period and a deduction of up to 100 percent of adjusted taxable income in 2020. What this means is that if a contractor incurred business losses in 2019 or 2020, it could look back up to five years to 2014 or 2015, respectively, to recoup previously paid taxes. NOLs can also carry forward any unused amount to a future tax year.

COVID-19 Casualty Loss Tax Refund

Predating the CARES Act, there is another way to recoup some of the lost revenue due to coronavirus-related losses. IRC Sec. 165 is used to help businesses deduct some of the losses from a federally declared disaster and is typically thought of during hurricanes or earthquakes, for example. However, COVID-19 also qualifies since it was declared a national emergency by President Trump.

To claim this deduction, contractors will need to file Form 4684 on their 2019 return. Any claimed tangible or intangible property must have a basis. Examples of when this deduction can be used include when a contractor had to scrap inventory for a project that was canceled, or if they were forced to close a job site or office location.

Other COVID-19 Tax Relief for Construction Companies

In addition to industry-specific tax law changes mentioned above, construction companies can maximize cash flow using provisions in the Families First Coronavirus Response Act (FFCRA) and the CARES Act.

Delay in Depositing Payroll Taxes

Contained in the CARES Act and changed in the PPP Flexibility Act, employers have the option of delaying their payroll tax deposits until December 31, 2021, and December 31, 2022. 50 percent of 2020 payroll taxes due would be paid at the end of 2021 and the other 50 percent at the end of 2022. There is no election to make and payroll taxes can be deferred even if the contractor is using PPP funds. This is an easy way to retain extra cash during 2020, just remember to allocate the payroll tax deposits accordingly for the next two years.

Tax Credits for Employee Paid Leave

Contractors that provide paid sick or family leave for employees who cannot work due to coronavirus are eligible for a paid sick leave credit through FFCRA. The covered period is from April 1, 2020, through December 31, 2020, and reimburses employers for up to ten days of qualified sick leave wages for employees, or up to ten weeks of qualified family leave wages when the employee cannot work to take care of a family member.

The tax credit for sick leave wages maxes out at 80 hours of regular pay and up to $511 per day/ $5,110 per employee. The tax credit for family leave wages is the same, except employers, are only required to pay two-thirds of a regular paycheck, up to $200 per day/$2,000 per employee. Part-time employees qualify too, on partial tax credits.

Contractors must have fewer than 500 employees to qualify and paid sick leave credits can be used with PPP funding. To apply, report total qualified leave wages plus healthcare expenses, and the employer’s share of Medicare tax, on Form 941 during the quarterly estimated tax filing. Form 7200 can be used at any time of year for a quicker turnaround.

Employee Retention Credit

Another source of immediate cash flow can be found in the CARES Act’s Employee Retention Credit. Contractors that either partially or fully shut down due to coronavirus or had at least a 50 percent decline in gross receipts from the year before are eligible. The credit is equal to 50 percent of qualified wages, up to $10,000. The amount the employer gets is up to $5,000 per year, per employee. Eligibility is determined on a per quarter basis. It is important to note, the Employee Retention Credit cannot be used at the same time as PPP loan funds. 

Contact Us

As the focus shifts from survival to recovery, it’s important to explore the various opportunities to reduce taxes and bolster cash flow. It can be difficult to make sense of the rules and regulations surrounding these opportunities, so it’s important to work with a qualified advisor to guide you through the process. If you have questions about the information outlined above or need assistance with another tax planning issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.