Tax Incentives for Contractors in New COVID-19 Relief Bill

The Consolidated Appropriations Act, 2021 (CAA), which was passed on December 27, 2020, provided a much-needed boost to millions of U.S. taxpayers and contained billions of dollars in new federal funding designed to support the construction industry. In addition to reviving the Paycheck Protection Program, the CAA contained several tax extenders and made other tax incentives permanent. This included a renewal of the Employee Retention Tax Credit, Section 179d, and several renewable energy-related credits. When combined these relief measures can help Atlanta construction companies and contractors manage through the persistent COVID-19 pandemic. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

Paycheck Protection Program

The CAA made first- and second-draw Paycheck Protection Program (PPP) loans available again, through March 31, 2021, or whenever funding runs out. This has clearly been good news for the industry; this year so far, construction firms have received $13.7 billion in PPP funding, second only to restaurants and hotels. In 2021, construction’s average loan size is $78,000 and most loans are for $50,000 or less.  

PPP funding is still available as of this writing for industry companies that have not yet applied. The loans can be used for payroll, certain operating expenses like rent and utilities, as well as uninsured property damage in 2020 caused by looting or vandalism, and certain supplier costs and operations expenses.

To qualify for second-draw PPP loans, construction firms must have used the previous loan in its entirety and demonstrated at least a 25 percent reduction in gross receipts in any quarter in 2020 compared to the previous period.

Employee Retention Tax Credit

The Employee Retention Tax Credit (ERTC) was another extension of the CARES Act. Thanks to the CAA, ERTC was not only extended to July 1, 2021, but also expanded. The new rules for 2021 make it more accessible to more companies. Last year, ERTC could be claimed for employees who were kept on payroll even during periods when the business was either closed or partially closed or experienced a 50 percent decline in gross receipts in any quarter. The benefit was limited to $5,000 per employee for the year (50 percent credit against $10,000 in eligible wages).

In 2021, the ERTC is still limited to the first $10,000 in eligible wages – but the benefit is per quarter, and the credit is 70 percent. This means that employers can get up to a $14,000 tax credit per employee. To qualify, a construction firm must have less than 500 full-time employees and experienced either a reduction in gross receipts of at least 80 percent compared to the same quarter in 2019 or a full or partial COVID-19-related shutdown.

The CAA also changed the rules regarding when a business can claim ERTC. Previously, businesses were prohibited from taking the ERTC if they also took out a PPP loan for the same period. Now, the ERTC can be claimed at the same time as a PPP loan. This change was made retroactive to March 27, 2020.

New eligibility in 2020 and 2021 for the credit should be welcome news for many construction firms, given how much the industry has relied upon PPP funds. Construction companies can amend prior Form 941s if they did not previously claim the ERTC due to PPP in 2020. They can still file Form 7200 to receive the credit prior to filing quarterly estimated taxes if the money is needed sooner.

Section 179D

The tax deduction for energy-efficient commercial building construction, which was set to expire at the end of 2020, was made permanent. Section 179D provides up to a $1.80 per square foot tax deduction for energy-efficient construction or improvements to interior lighting, HVAC, or building envelope systems. To qualify, related construction or improvements must reduce power costs or energy consumption by 50 percent annually.

Section 179D improvements must meet the higher standards of ASHRAE 90.1-2019 and, new for 2021, the amount of the deduction will be indexed for inflation.

Renewable Energy Tax Incentives for Construction

Continuing with the emphasis on green building tax incentives, the CAA contained other clean energy incentives that construction firms may be able to claim over the next few years. Overall, the deadline to begin renewable energy construction projects has been extended and existing credits have been expanded.  

Solar Investment Tax Credit (ITC)

The solar ITC is a tax credit based on a percentage of a project’s cost basis; in 2019, this was 30 percent. Solar ITCs were scheduled to phase out beginning in 2021 but this phase-out has been extended by two years.

Solar projects where construction begins in 2021 or 2022 are eligible for a 26 percent ITC, or 22 percent if construction begins in 2023. Projects must be placed in service by 2025, otherwise, the ITC will only qualify for 10 percent of the tax credit.

Offshore Wind Investment Tax Credit (ITC)

Offshore wind ITC construction projects beginning between January 1, 2021, and December 31, 2025, now qualify for a 25 percent ITC. Additionally, offshore wind construction projects that began between January 1, 2017, and December 31, 2020, retroactively qualify for a 30 percent ITC. In comparison to the previous rules, offshore wind projects that began construction in 2021-2025 would not have qualified for any ITCs.

Especially given the higher future tax credits and ability to retroactively claim higher tax credits for previous years, construction companies involved in these projects need to consider amending prior-year tax returns. Note that offshore wind ITCs cannot be claimed at the same time as PTCs; it’s either one or the other.

Onshore Wind Production Tax Credit (PTC)

Eligible wind construction projects can qualify for PTCs based on their energy production and sales during the year; however, PTCs were being phased down between 2017 and 2020 and scheduled to phase out entirely in 2020. Under the CAA, onshore wind construction projects were given an extra year of the 60 percent tax credit. Like offshore wind projects, they must be placed in service by December 31, 2025.

Other Construction-Related Tax Incentives

In addition to a focus on energy efficiency, the CAA also extended several other construction and real estate tax incentives. Each are designed to spur investment and building projects in underserved communities, or in the case of the Work Opportunity Tax Credit, create jobs.

The following tax credits were extended by five years:

• New Market Tax Credits
  • Incentivizes investments in low-income communities to hopefully stimulate affordable housing.
• Work Opportunity Tax Credit (WOTC)
  • Provides tax credits for employers that hire from targeted groups, including veterans, long-term unemployed, SNAP recipients, ex-felons, and others.
• Empowerment Zones
  • Incentivizes commercial real estate development and construction in economically distressed communities.

Contact Us

There is no shortage of saving opportunities available to Atlanta construction companies and contractors. Given the number of incentives available it is important to consult with a qualified tax advisor to determine the best path forward. If you have questions about the information outlined above or need assistance with an accounting or audit need, 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.