What Do Businesses Need to Know About Tax Reform?

As 2018 begins and businesses plan for the months ahead, they will have to take into consideration drastic new changes to U.S. tax law. After months of Congressional debate, President Trump signed the Tax Cuts and Jobs Act into law on December 22, and all provisions went into effect on January 1. This law, which contains over $1.4 trillion in tax cuts for individuals and businesses, represents the most significant overhaul of the tax code in more than 30 years.

Despite the several major changes ushered in by the new law, other key provisions that are crucial to business taxpayers remain intact. For example, the Research and Development (R&D) Tax Credit is still a permanent part of the tax code as it was added under the PATH Act of 2015, and cost segregation remains available as a tax-saving strategy for commercial building owners. Furthermore, the Tax Cuts and Jobs Act does not address the §179D deduction for energy-efficient commercial buildings. The §179D deduction expired at the end of 2016, and although several bills have been introduced proposing its renewal, Congress has not taken action to pass any of these bills. At Capital Review Group, we are staying tuned for any news on §179D and will post an update if this valuable incentive is renewed.

One of the stated goals of the Tax Cuts and Jobs Act is to stimulate the economy, hiring, and wage growth by alleviating the tax burden on businesses. In pursuit of this goal, the law includes several provisions that will bring sweeping changes for business taxpayers, from small businesses to large corporations. Here are some of the most important provisions:

    • Lower corporate tax rate. Previously, corporations with over $10 million of annual income were taxed at a rate of 35 percent. In recognition of the fact that this was far higher than corporate tax rates in many other developed countries, the new law has permanently lowered corporate taxes to a flat rate of 21 percent.
    • Corporate AMT repealed. The law eliminates the alternative minimum tax (AMT) for businesses. Designed to prevent high-income taxpayers from whittling away their tax burdens with credits and deductions, the corporate AMT required businesses to pay taxes at a rate of at least 20 percent—regardless of any incentives for which they qualified. Although the new tax law retains an AMT for individuals, businesses will no longer need to worry about this long-detested barrier to minimizing their tax burdens.
    • Expanded bonus depreciation. Previously, the concept of bonus depreciation allowed business taxpayers to depreciate a certain percentage of the cost of new business property during the year it was placed into service, and then depreciate the remainder over the property’s useful life. This enabled businesses to seize more substantial and immediate tax savings than they would if they depreciated the item’s cost in equal proportions over the course of its useful life. However, from now through 2022, the new tax law will permit businesses to immediately deduct 100 percent of the cost of eligible property during the year it is placed into service. In subsequent years, the maximum amount of bonus depreciation allowed up-front will reduce gradually: 80 percent will be allowed in 2023, 60 percent in 2024, 40 percent in 2025, and 20 percent in 2026. In addition, the new law eliminates the restriction that bonus depreciation is only available for brand-new property.
    • Expanded use of the cash method of accounting. The new law will increase the number of business taxpayers that use the cash method of accounting by authorizing its use for businesses with $25 million or less in average annual gross receipts for the three previous tax years.
    • Deduction for pass-through entities. The law grants pass-through entities—which encompass many small businesses, like S-corporations, partnerships, and sole proprietorships—a tax deduction of up to 20 percent. Although this deduction will be a boon to most smaller businesses, it is not available to those that provide services (such as law firms and medical practices) and earn $315,000 or more per year.
    • Changes to the taxation of foreign profits. In addition to facing a higher-than-average corporate tax rate, American businesses have traditionally dealt with another costly obstacle: U.S. taxation of profits earned abroad. In shifting to a more territorial tax system—or one in which a company is only taxed on income earned within a country’s borders—the new law will exempt American businesses from taxation on most future profits earned in other countries. The law also addresses the issue of stockpiled foreign cash, which many companies have accrued over the years as a way to avoid the high U.S. corporate tax rate. This cash will now be subject to a mandatory, one-time tax of 15.5 percent upon repatriation to the U.S.
    • Increased §179 expensing. Section 179 of the tax code allows businesses to deduct the purchase price—up to a specified amount—of certain types of equipment, furniture, software, vehicles, or other items used for business purposes. Previously, businesses could claim a maximum §179 deduction of $500,000 for up to $2 million of qualifying purchases (with both amounts indexed for inflation). In addition to expanding the definition of §179 property, the new tax law raises the maximum deduction to $1 million for up to $2.5 million of qualifying assets.

With these sweeping changes and many more now in place under the Tax Cuts and Jobs Act, businesses must be aware of the new opportunities and potential pitfalls that could impact their bottom lines. At Capital Review Group, our team of tax experts stays updated on the latest changes in tax law. We will provide guidance for your business or your clients’ businesses, ensuring that all available opportunities for tax savings are maximized. Contact CRG today to schedule a pro bono analysis!

(Sources: https://www.journalofaccountancy.com/news/2017/dec/tax-reform-bill-changes-for-businesses-201718071.html, https://www.congress.gov/bill/115th-congress/house-bill/1?q=%7B%22search%22%3A%5B%22hr+1%22%5D%7D&r=1, https://www.businessnewsdaily.com/10357-small-business-tax-reform-changes.html).

Tax Savings Opportunities for California Businesses

With a goal of spurring the economy and helping businesses thrive in California, the state has created several incentives and other opportunities for businesses to greatly reduce their tax burdens. These lucrative opportunities—which are often overlooked by business taxpayers—include the California Competes Tax Credit, grants for training employees, and the partial sales and use tax exemption for manufacturing and R&D equipment.

California Competes Tax Credit

Designed to attract and retain business, the California Competes Tax Credit is available to organizations that would like to come, stay, or grow in California. Eligible businesses may use the credit against their state income or franchise taxes. For fiscal year 2017-2018, the state has made over $230 million available through the California Competes Tax Credit, with 25 percent reserved for small businesses (defined as those with less than $2 million in revenue). As a result, businesses of all sizes may save tens or hundreds of thousands of dollars through this credit.

Applying for the California Competes Tax Credit is a competitive process, and eligibility is based on certain milestones related to hiring and investment activities. GO-Biz, the agency that negotiates the tax credit agreements, examines applicants based on 11 different factors, including the number of jobs that an applicant creates or retains, employee compensation, and the applicant’s opportunities for future growth. Recipients of the California Competes Tax Credit are subject to required reporting and oversight by GO-Biz.

The upcoming application periods for 2018 are as follows:

  • January 2 through January 22, 2018
  • March 5 through March 26, 2018

California Training Grants

Another way in which California supports the success of in-state businesses is by providing grant funding to offset the costs of training new and existing employees. Small businesses may receive $26 per training hour, while larger businesses are eligible for grants of $18 per hour. Qualifying training includes many activities that businesses perform in the course of their normal operations, such as classes, learning luncheons, and new employee onboarding.

To receive a training grant, a business must have a non-voluntary turnover rate of less than 20 percent, and employees must earn at least $15.50 per hour after their training is complete. The Employment Training Panel (ETP) gives preference to businesses that:

    • Have fewer than 100 employees
    • Request $100,000 per year or less
    • Are manufacturers, technology firms, or technical professional firms
    • Are facing out-of-state competition

Sales Tax Exemption for Manufacturing and R&D Equipment

Since July 1, 2014, California has allowed manufacturers and certain businesses engaged in research and development (R&D) activities to obtain a partial exemption on the sales and use taxes associated with the purchase or lease of manufacturing or R&D equipment. With the partial exemption rate currently set at 4.1875 percent, qualifying equipment is taxed at 3.3125 percent as opposed to the statewide rate of 7.5 percent—a difference that can save businesses millions of dollars.

In July 2017, Governor Jerry Brown signed into law AB 398, which has expanded the sales tax exemption and extended it through June 30, 2030. This new law extends the exemption to taxpayers engaged in certain types of conventional and renewable electric power generation, distribution, and storage, as well as some agricultural businesses.

To benefit from this exemption, a business must:

    • Be a “qualified person” primarily engaged in certain types of business, including manufacturing and R&D in biotechnology or the physical, engineering, or life sciences
    • Purchase “qualified property,” such as equipment and machinery
    • Use the qualified property for permitted purposes, such as R&D activities, any stage of the manufacturing process, or other purposes enumerated by the law

As an incentive and tax advisory firm, Capital Review Group offers the in-depth knowledge needed to help California businesses or their tax professionals maximize savings through these opportunities. We can assist you with determining eligibility, completing the application process, ensuring compliance, and more. Contact CRG to learn more or schedule a pro bono analysis!

Tax Savings in the Present May Yield Substantial Income in the Future

For business owners seeking to boost net profits, taking advantage of all possible opportunities for tax savings offers a powerful solution. As they build their businesses, however, it is also crucial that owners plan for retirement and ensure that their tax and financial strategies are designed to support them in their later years. Fortunately, with some strategic planning, tax savings available to business owners may enable them to build future wealth, create comfortable lifestyles in retirement, or leave legacies for their families.

At Capital Review Group, our team of tax experts has helped business clients in a variety of industries maximize savings through often-overlooked incentives and strategies found in the tax code. The following examples represent real tax savings achieved by our clients, as well as demonstrations of how the amounts saved may be invested in order to generate future tax-free income—helping business owners reach their financial goals for retirement and beyond.

Hotel Owners Save $700,000 through Cost Segregation and Transform it into a Legacy for Their Children

A family-owned hotel on the East Coast was thriving, generating considerable income for the aging owners. However, a significant burden was growing along with the hotel’s success: taxes. The owners sought to minimize their tax liability as a way to ensure continued success for the hotel and financial well-being for their family. Fortunately, they were able to use the IRS-approved strategy of cost segregation to unlock substantial tax savings by simply changing the classification of certain assets in the hotel building.

Typically, real property is depreciated over 39 years for tax purposes, while personal property is depreciated over five, seven, or fifteen years. A cost segregation study uses engineering principles to reclassify certain real property assets as personal property—allowing commercial building owners to seize more substantial and immediate deductions. As a result of a cost segregation study performed by CRG, 29 percent of the hotel’s assets were reclassified as personal property, saving the hotel owners approximately $700,000 in taxes over a five-year period.

Since the hotel owners were beginning to plan for retirement, they decided to invest their six-figure savings in a tax-efficient estate plan that included life insurance. Due to strategic use of their tax savings, the estate plan is projected to yield a $2,241,265 tax-free death benefit guaranteed for 43 years—an amount that will help the owners fulfill their goal of ensuring that the hotel will have enough liquidity to stay in the family for generations.

Cost Segregation Saves Building Owners $300,000, Yielding a Potential $3.3 Million of Tax-Free Retirement Income

A married couple in the Phoenix area owned two successful medical practices: the husband was a renowned veterinarian, while the wife was a trusted OB/GYN. The couple also owned the buildings in which they had their offices. As their practices grew and prospered, the couple faced mounting tax liabilities every quarter. They knew that they had to cut costs in order to continue providing their patients with optimal care.

After consulting CRG, these ambitious medical professionals learned that as commercial building owners, they may be able to reduce their tax burdens through cost segregation. CRG performed a cost segregation study on their buildings, reclassifying several real property assets as personal property. As a result, the couple saved almost $300,000 in taxes, which allowed them to eliminate their tax liability for two full years and part of another.

The substantial tax savings helped the couple grow their businesses and inspired them to start planning for retirement. They met with their financial advisors and learned that if they were to apply the $300,000 savings toward a life insurance retirement plan (LIRP), they could receive an estimated $94,884 of tax-free income per year between the ages of 65 and 100—which would total over $3.3 million. By using their building assets to minimize their tax burden and applying those savings toward a retirement plan, the couple can be sure that they will enjoy a comfortable lifestyle long after their years of serving patients have ended.

R&D Credit Saves Architecture Firm $188,000—An Amount that Could Represent Over $14 Million of Tax-Free Retirement Income

The Research and Development (R&D) Tax Credit saves large corporations billions of dollars each year, but is often overlooked by eligible small and medium-sized businesses in a variety of industries. An architecture firm in Washington discovered the power of the R&D Credit when it claimed $188,000 in tax savings for designing a new, energy-efficient school building. By requiring the firm to evaluate and implement innovative design techniques, the project satisfied the R&D Credit’s four basic requirements:

    • Intent to create new or improved functionality of a business component, such as a product, process, or software.
    • Elimination of uncertainties regarding the activity’s design, process, method, or cost.
    • A process of experimentation, such as modeling, testing, or informal trial and error, designed to resolve uncertainties.
    • Reliance on the principles of engineering, biology, physics, or computer science.

The architecture firm worked with CRG to prepare the necessary documentation, such as project lists and payroll reports, and maximize tax savings under the R&D Credit. CRG also estimated that based on the firm’s routine activities, it may be able to repeat a tax savings of approximately $188,000 each year for seven years—resulting in a total savings of $1,316,000 through the R&D Credit alone.

However, the benefits of the credit may not end with the firm’s significantly reduced tax burden. After consulting a financial advisor, the owners of the firm learned that if they were to invest the $1.3 million of tax savings in a LIRP, they could receive over $406,000 of tax-free income per year between ages 65 and 100. This may result in a staggering $14 million or more in retirement income to support the architecture firm’s owners during their later years.

These case studies represent just a few examples of how business owners can use the tax code to generate wealth, boosting their net profits through tax savings and applying those savings to high-growth, tax-efficient retirement plans. To learn more about the lucrative opportunities for tax savings that may be available to your business or your clients’ businesses, contact CRG today!

Business Victims of Hurricanes Harvey and Irma May Find Relief Through Tax Incentives

On August 25, 2017, Hurricane Harvey made landfall near Houston, Texas, depositing nearly 50 inches of rain in some areas and claiming at least 70 lives. Two weeks later, Hurricane Irma hit Florida, wreaking havoc throughout the state and causing damage in other parts of the Southeast. In addition to the devastation that these storms have caused individuals, thousands of businesses have experienced substantial losses.

Fortunately, these businesses may find relief from an unexpected source: state and federal tax law. In the wake of Hurricane Katrina—which is still considered the costliest hurricane to ever strike the U.S.—many tax incentives were expanded in order to help businesses offset their losses and reenergize local economies. While it remains unclear whether the government will offer similar relief for business victims of Harvey and Irma, taxpayers should be aware of the potential incentives that may be available.

The GO Zone Act of 2005

Many of the post-Katrina incentives were expanded as part of the Gulf Opportunity Zone (GO Zone) Act of 2005. These included:

  • New Markets Tax Credit (NMTC). This credit was initially created in 2000 with the goal of encouraging economic growth and development by incentivizing private investment in distressed communities. Investors may receive a substantial federal tax credit when they make equity investments in Community Development Entities, which serve as financial intermediaries between investors and qualified businesses located in struggling areas. The NMTC is equal to 39 percent of the original investment amount and is claimed over a seven-year period. After Hurricane Katrina, the GO Zone received an additional $1 billion in NMTC allocations between 2005 and 2007.
  • Low Income Housing Tax Credit (LIHTC). Created in 1986 to encourage developers to build affordable housing, the LIHTC program is one of the most extensive affordable housing efforts in the U.S. The program grants federal tax credits to states on a per capita basis. State and local agencies then allocate the credits to developers for the acquisition, rehabilitation, or new construction of rental housing for low-income households. Over the years, the IRS has occasionally suspended certain requirements of the LIHTC for disaster-affected areas. Additional information on how the LIHTC may be expanded following major disasters can be found in Rev. Proc. 2014-49 (https://www.irs.gov/irb/2014-37_IRB/ar07.html).
  • Historic Rehabilitation Tax Credit (HTC). This credit is designed to attract private sector investment for the rehabilitation of historic buildings. Under the HTC, taxpayers may receive a twenty percent income tax credit for rehabilitating income-producing buildings that are deemed “certified historic structures” by the Secretary of the Interior. In addition, a ten percent income tax credit is available for rehabilitating non-historic buildings that were placed in service before 1936. Under the GO Zone Act, these amounts were increased to 26 percent for historic buildings and thirteen percent for non-historic buildings.

The Katrina Emergency Tax Relief Act of 2005

In addition to the GO Zone Act, the federal government also provided relief through the Katrina Emergency Tax Relief Act of 2005. This law temporarily expanded target groups under the Work Opportunity Tax Credit (WOTC) to include individuals whose principal place of living was in the Core Disaster Area as of August 28, 2005. The revised WOTC also included a tax credit equal to 40 percent of the first $6,000 in wages that employers paid to eligible workers, if the employer’s business was located in the Core Disaster Area and was rendered inoperable by hurricane damage.

The Katrina Emergency Tax Relief Act also created an employee retention tax credit in order to encourage small businesses located in the Core Disaster Area to keep employees on payroll. The credit was equal to 40 percent of the first $6,000 in wages paid to eligible employees between August 28 and December 31, 2005. While WOTC applies to businesses of all sizes, the employee retention credit was initially only available to those with 200 or fewer employees. The GO Zone Act later extended this credit to larger businesses, as well as those impacted by Hurricanes Rita and Wilma.

Other sources of tax relief

In the wake of Hurricane Katrina, the IRS made several allowances to help ease the burden on individual and business taxpayers. For example, the IRS extended deadlines for filing and payment of taxes, partnered with tax professionals to assist victims with their tax needs, raised the standard mileage rate for businesses, and more. Currently, the IRS is taking some of the same steps to relieve victims of Harvey and Irma. While the federal government has not yet announced whether it will expand various tax incentives as was done after Katrina, the IRS has already extended tax filing deadlines for those affected. For businesses in certain counties of both Texas and Florida, the October 31 deadline for filing quarterly payroll and excise tax returns has been extended until January 31, 2018.

Business victims of hurricanes may also find tax relief at the state level. For example, the Texas Historic Preservation Tax Credit (THPTC) program enables property owners to offset costs related to post-disaster recovery of designated historic buildings that are used for commercial or non-profit purposes. Property owners may receive a tax credit equal to 25 percent of qualified rehabilitation expenses on certified projects. The credit may be taken against either the Texas franchise or insurance premium taxes, or it may be sold if the taxpayer does not owe these types of taxes.

What should businesses affected by the hurricanes do?

As lawmakers consider options to help rebuild the economies that were damaged by these devastating storms, business victims should take the following steps:

  • When hiring new employees, consider candidates who reside in distressed and storm-affected areas. If Congress expands WOTC as it did under the Katrina Emergency Tax Relief Act, these workers may be added as a target group—opening employers to the possibility of substantial tax savings for hiring them.
  • Keep employees on payroll as the business recovers from the storm, in the event that Congress enacts an employee retention credit.
  • Maintain thorough employee records. While copious record keeping is always recommended for tax purposes, it will be particularly helpful to support a WOTC or employee retention claim.
  • Document all repairs and improvements to buildings, particularly historic buildings or those located in struggling communities.
  • Consult with a tax professional for guidance on tax credits and other forms of relief that may be available.

At Capital Review Group, we are monitoring the actions of Congress and the IRS, and will post any updates on tax incentives that may be expanded for the benefit of hurricane victims. Contact us today to learn more.

(Sources: https://www.cdfifund.gov/programs-training/Programs/new-markets-tax-credit/Pages/default.aspx, https://www.cdfifund.gov/Documents/atgnmtc.pdf, https://nhlp.org/lihtcoverview, https://www.nps.gov/tps/tax-incentives.htm, https://www.journalofaccountancy.com/issues/2006/feb/survivingkatrina.html, https://www.irs.gov/newsroom/tax-relief-for-victims-of-hurricane-irma-in-florida, https://www.irs.gov/newsroom/tax-relief-for-victims-of-hurricane-harvey-in-texas).

New Bipartisan Bill Would Expand and Make Permanent the §179D Deduction

Update: On February 9, President Trump signed into law the Bipartisan Budget Act of 2018. This new law retroactively renews the §179D deduction for 2017. Therefore, commercial building owners and primary designers may now claim the deduction for qualifying energy-efficient projects completed in 2017. At this time, however, Congress has not taken any action to extend §179D for 2018 or future years. Capital Review Group will keep abreast of Congressional activity, and we will post any further updates regarding the §179d deduction. 

Since the §179D deduction for Energy Efficient Commercial Buildings expired at the end of 2016, several bills have been introduced in Congress proposing to extend and/or strengthen this important incentive. Most recently, H.R. 3507 was introduced on July 27 by Rep. Dave Reichert [R-WA] and co-sponsored by Earl Blumenauer [D-OR] and Tom Reed [R-NY]. If enacted, this bill—which is not to be confused with the Clean Energy for America Act that was introduced in May and is still under consideration by Congress—would permanently add the §179D deduction to the tax code and would expand its applicability.

The §179D deduction was created under the Energy Policy Act (“EPAct”) of 2005. However, since it has never been a permanent part of the tax code, the deduction has repeatedly expired and typically has been renewed by Congress due to its widespread popularity. Until its latest expiration on December 31, 2016, §179D offered commercial building owners and primary designers—such as architects, engineers, and contractors—a tax deduction of up to $1.80 per square foot for implementing energy efficiency measures. Specifically, the incentive is worth up to $0.60 per square foot for improvements to a building’s HVAC systems, $0.60 for improvements to lighting, and $0.60 for the building envelope.

In addition to making the §179D deduction permanent, H.R. 3507 (if enacted) would change it in the following ways:

  • Tribal governments and 501(c)(3) non-profit organizations would be able to allocate their deductions to primary designers. Previously, if the building owner was a federal, state, or local government entity, the deduction could be allocated to the primary designer of the qualifying energy-efficient improvements. By allowing two additional types of tax-exempt entities to do the same, H.R. 3507 would incentivize more designers to choose energy efficiency measures.
  • The deduction could be allocated to partnerships and S-corps. This would benefit many small to mid-sized architecture, engineering, and construction firms that design or install qualifying improvements for tax-exempt entities.
  • The deduction would be more compatible with the low-income housing tax credit, which would help to promote energy efficiency measures in affordable housing facilities.

The full text of H.R. 3507 is available at https://www.congress.gov/bill/115th-congress/house-bill/3507/text.

If enacted, H.R. 3507 would allow taxpayers greater stability in their building plans and tax strategies, improve the environment by incentivizing energy efficiency, and boost the economy by helping businesses reduce their tax burdens. For these reasons, the bill has drawn bipartisan support, as well as a strong endorsement by the American Institute of Architects (AIA). However, its chances of passage may be impaired by the Trump Administration’s preference to invest in fossil fuel research as opposed to renewable energy and energy efficiency efforts. Therefore, taxpayers must not assume that the bill will pass and should stay tuned for further news from Congress.

While the team at Capital Review Group remains cautious in our optimism that Congress will act positively on H.R. 3507, we reiterate our firm support for this bill or others that would strengthen §179D. As part of our comprehensive incentive review services, CRG stays up to date on the latest changes to §179D and other tax provisions affecting businesses. Contact us today to schedule a pro bono analysis!

(Sources: https://archinect.com/news/article/150019935/the-aia-endorses-energy-efficiency-tax-incentive-legislation, https://reichert.house.gov/press-release/reichert-blumenauer-reed-introduce-bill-strengthen-use-energy-efficient-commercial).

Clean Energy for America Act Proposes Significant Changes to the §179D Deduction

Update: On February 9, President Trump signed into law the Bipartisan Budget Act of 2018. This new law retroactively renews the §179D deduction for 2017. Therefore, commercial building owners and primary designers may now claim the deduction for qualifying energy-efficient projects completed in 2017. At this time, however, Congress has not taken any action to extend §179D for 2018 or future years. Capital Review Group will keep abreast of Congressional activity, and we will post any further updates regarding the §179d deduction. 

United States in a tangible form

After months of Congressional inaction on the §179D tax deduction—which expired on December 31, 2016—a new bill introduced in the Senate has proposed renewing this important incentive through 2018 and significantly expanding its value for taxpayers. Named the Clean Energy for America Act, the bill was introduced on May 4 by Senator Ron Wyden [D-OR] and 21 co-sponsors and has been referred to the Committee on Finance. This sweeping piece of proposed legislation aims to strengthen and simplify the 44 existing energy tax incentives, many of which are too short-term to fulfill their intended purpose of advancing energy conservation goals in the U.S. Under the Clean Energy for America Act, the §179D deduction would be worth up to $4.75 per square foot for owners of new commercial buildings and up to $9.25 per square foot for owners of existing buildings.

Until its expiration at the end of 2016, §179D offered owners of new or existing commercial buildings a deduction of up to $1.80 per square foot for installing energy efficiency measures in a building’s envelope or lighting or HVAC systems. In the case of buildings owned by tax-exempt government entities, the owner may allocate the deduction to the “primary designer”—such as the architect, engineer, contractor, or energy consultant—of the qualifying improvements. Although the §179D deduction has lapsed, taxpayers still have a limited amount of time to claim it for past projects. Therefore, building owners and designers who have installed qualifying energy-efficient features should contact a tax professional as soon as possible.

If enacted, the Clean Energy for America Act would change this incentive in the following ways:

  • Section 179D would be limited to energy efficiency measures in new construction. The Act proposes creation of a new provision, 179F, for retrofits in existing buildings.
  • The 179D deduction would range from $1.00 to $4.75 per square foot. Taxpayers would be eligible for a $1.00 per square foot deduction for installing features that are 25 percent more efficient than the standards listed in ASHRAE 90.1-2016, and an additional deduction of $0.25 per square foot for every five percentage points over those standards. For example, features that are 30 percent more efficient than ASHRAE 90.1-2016 would qualify for a $1.25 per square foot deduction, features that are 35 percent more efficient would receive $1.50 per square foot, and so on.
  • Under 179F, owners of existing commercial buildings would be eligible for a tax deduction of $1.25 per square foot for installing retrofits that reduce energy consumption by 20 percent over previous levels. They would receive an additional deduction of $0.50 per square foot for every five-percent reduction in energy usage over the 20 percent threshold, up to $9.25 per square foot.
  • Under both 179D and §179F, 501(c) nonprofit organizations—in addition to governmental entities—would be permitted to allocate their deductions to primary designers.
  • As before, energy efficiency measures would have to be certified by a third party using Department of Energy-approved software in order for the taxpayer to qualify for the deduction.

In the years since it was first enacted under the Energy Policy Act (“EPAct”) of 2005, the §179D deduction has created skilled jobs, served as a powerful incentive for building owners to choose sustainable features, and stimulated the national economy by allowing businesses that own commercial buildings to substantially reduce their tax burdens. For these reasons, Capital Review Group is a strong advocate of the Clean Energy for America Act and other bills that would extend and/or expand the §179D deduction.

The team at CRG stays updated on the latest news regarding the §179D deduction and other business tax incentives. Our experts are approved to certify §179D claims and can advise building owners and primary designers on the options available for minimizing their tax burdens through energy-efficient improvements. Contact us today to learn more or schedule a pro bono analysis!

(Sources: https://www.finance.senate.gov/imo/media/doc/Clean%20Energy%20for%20America%20Act%20-%20One%20Pager%20(002).pdf), https://www.congress.gov/bill/115th-congress/senate-bill/1068/text#toc-id50B49E0EC70C4BE69836146432985EA9).


California Considers Legislation to Expand Sales Tax Exemption for Manufacturing and R&D Equipment

Since 2014, California has allowed certain businesses engaged in manufacturing and research and development (R&D) activities to pay a substantially lower sales tax rate when they purchase or lease qualifying equipment. Specifically, eligible businesses are only required to pay state sales and use tax at 3.3125 percent, as opposed to the regular rate of 7.25 percent. This partial exemption was enacted with the goal of bolstering the state’s economy by attracting business and creating high-skilled manufacturing and R&D jobs. However, in light of recent reports indicating that the exemption is underutilized, the California Legislature is considering bills that would expand the measure.

Currently, businesses must meet three requirements in order to claim the exemption. They must:

  • Be a “qualified person” engaged in certain types of business—primarily manufacturing or R&D.
  • Purchase or lease “qualified property,” which is defined to include equipment used in manufacturing or R&D that has a useful life of one or more years, or machinery, fixtures, or other materials used in buildings that are constructed for manufacturing or R&D purposes.
  • Use the qualified property for permitted purposes more than 50 percent of the time. Permitted purposes include manufacturing, processing, refining, fabricating, or research and development in the physical or life sciences, engineering, or biotechnology.

Eligible businesses may claim the exemption for qualifying purchases of up to $200 million per year. While they are still required to pay local sales and use taxes, the exemption could save a business millions of dollars.

Concerns have recently been raised that the exemption is not fulfilling its intended purpose of attracting jobs and investment to California. The 2015 Reshoring Initiative Data Report stated that out of 130,000 manufacturing jobs that were brought back to the U.S. between 2010 and 2015, only 1,479 were reshored in California. Additionally, according to a report that the State Board of Equalization (BOE) delivered to the Legislature on March 1, 2017, businesses claimed approximately $165 million under the exemption in 2016—which is only one-third of the amount that was predicted when the exemption was enacted.

In order to expand use of the partial sales tax exemption and advance the goal of stimulating the state economy, legislators have introduced AB 600 and SB 600. These bills propose several changes to the exemption, including:

  • Raising the $200 million annual limit
  • Extending the exemption to agricultural processors and businesses that produce electric power from alternative sources
  • Adopting a broader definition of “useful life”
  • Extending the current sunset date of July 1, 2022

As the California Legislature considers whether to expand the partial exemption, businesses that conduct manufacturing and R&D activities should consult with tax professionals to determine how they can maximize savings on state sales and use taxes. The team at Capital Review Group (CRG) offers expertise on California tax law, as well as tax issues related to manufacturing and R&D. Contact CRG to learn more or schedule a pro bono analysis!

(Sources: http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201720180SB600, https://www.boe.ca.gov/sutax/manufacturing_exemptions.htm, http://www.boe.ca.gov/pdf/pub541.pdf, http://www.cpapracticeadvisor.com/news/12325326/california-issues-update-on-sales-tax-exemption-for-manufacturing-and-research-and-development-equipment).

Section 179D Has Expired, But Commercial Building Owners Can Still Save with These Two Tax Strategies

Update: On February 9, President Trump signed into law the Bipartisan Budget Act of 2018. This new law retroactively renews the §179D deduction for 2017. Therefore, commercial building owners and primary designers may now claim the deduction for qualifying energy-efficient projects completed in 2017. At this time, however, Congress has not taken any action to extend §179D for 2018 or future years. Capital Review Group will keep abreast of Congressional activity, and we will post any further updates regarding the §179d deduction. 

Between the costs associated with maintenance, utilities, and improvements, owning a commercial building is an expensive endeavor. Building owners face the constant dilemma of how to save money without compromising the comfort of tenants and customers. When considering financial strategies, building owners may discover a boon in the federal tax code.

The §179D deduction, which rewards energy efficiency measures in commercial buildings, has been one of the most powerful tax incentives available to building owners and primary designers since it was created under the Energy Policy Act (“EPAct”) of 2005. This popular deduction expired on December 31, 2016, and Congress is still considering options for its renewal. However, there is a limited amount of time remaining to claim §179D for past projects through the look-back period, so commercial building owners that have installed energy efficiencies should consult with a tax professional immediately. Section 179D offers a deduction of up to $1.80 per square foot when qualifying improvements are made to lighting systems, the building envelope, or HVAC systems.

In addition to §179D, the tax code equips commercial building owners with other tools to substantially reduce their tax burdens, including cost segregation and the tangible property regulations.

Cost Segregation

Cost segregation is an IRS-approved strategy that allows taxpayers to quickly boost cash flow by simply changing the classification of certain property assets. Typically, real property is depreciated over a 39-year period, while tangible personal property is depreciated over five, seven, or fifteen years. Therefore, personal property yields more substantial and immediate depreciation deductions for the owner.

A cost segregation study—which is usually performed by a third-party with engineering and tax expertise—subdivides a real property asset into items that may be considered tangible personal property. Examples of these items include certain types of electrical wiring, carpeting, and wall coverings. By reclassifying these items from real property to personal property, the building owner can take advantage of the shorter depreciation lives and claim accelerated depreciation deductions. This significantly lowers the building owner’s tax burden, thereby generating cash flow that may be used to repair, maintain, or improve the building.

Tangible Property Regulations

The tax code’s tangible property regulations went into effect on January 1, 2014. They apply to all taxpayers that have acquired, produced, or improved tangible property, such as buildings or equipment. The regulations allow taxpayers to expense items that were capitalized as improvements in previous years—enabling them to claim additional deductions and losses. Since commercial buildings are full of assets that sometimes require repair, replacement, or improvement, the tangible property regulations offer an effective way for building owners to reduce their tax burdens. In order to reap the benefits of the regulations, taxpayers should be ready to produce meticulous documentation of improvements, repairs, and dispositions of assets.

Are you looking for ways to cut the costs associated with owning a commercial building and improve your cash flow? With a unique combination of facility engineering and tax accounting expertise, the team at Capital Review Group can help you maximize tax savings through strategies like §179D, cost segregation, and application of the tangible property regulations. Contact CRG to schedule a pro bono analysis!

Small and Mid-Sized Defense Contractors, Have You Considered the R&D Credit as a Tool for Tax Savings?

Research Tax Credit Defense Contractors Capital Review GroupThe United States is protected by one of the strongest and most technologically advanced militaries in the world. A key factor contributing to the U.S. military’s sophistication is the federal government’s use of private contractors to design and manufacture innovative solutions for the nation’s defense needs. Each year, major defense contractors—such as Lockheed Martin and Northrop Grumman—boost their net profits by seizing all of the opportunities for tax savings available to them. However, significant tax savings are not just for large companies. Small and mid-sized military and defense contractors routinely qualify for lucrative incentives like the Research and Development (R&D) or Research and Experimentation Tax Credit, but forego pursuing them due to unawareness or the mistaken belief that they are not eligible.

The R&D Credit was created with the goal of spurring innovation and progress within the U.S. Contrary to a common misconception, the Credit does not only reward scientific or high-tech research; it is available to businesses of all sizes in a wide variety of industries and offers a dollar-for-dollar credit for developing new or improved products, processes, or software. Defense contractors frequently perform activities that may qualify for the R&D Credit. A few examples include:

  • Designing and manufacturing defense equipment
  • Performing engineering calculations
  • Streamlining manufacturing processes
  • Improving equipment
  • And many others

Recent changes have made the R&D Credit more available than ever to small and mid-sized businesses. The Protecting Americans from Tax Hikes (PATH) Act of 2015 permanently added the Credit to the tax code and expanded it for the benefit of businesses without substantial income tax burdens:

  • Smaller businesses can now use the R&D Credit to offset their alternative minimum tax (AMT) burdens. To seize this benefit, a business must have had an average of $50 million or less in gross receipts over the past three years.
  • New businesses, including start-ups, can use the R&D Credit to reduce payroll taxes. These businesses must have been in operation for less than six years and have $5 million or less in revenue for the current tax year, as well as no gross receipts for the preceding five years.

Although the political climate is constantly changing, a recent study conducted by the Center for Strategic and International Studies (CSIS) indicated a growing trend of the federal government awarding military R&D contracts to smaller companies. According to the study, the percentage of contracts between the government and smaller defense contractors increased from ten percent in 2009 to seventeen percent in 2015. In light of this finding—as well as the PATH Act’s expansion of the R&D Credit—now is the time for small and mid-sized defense contractors to review their activities and determine if they have conducted qualified research that may entitle them to significant tax savings.

A taxpayer’s activities must meet a four-part test in order to constitute qualified research eligible for the R&D Credit:

  • The taxpayer must pursue the permitted purpose of creating a new or improved product, process, or software.
  • The taxpayer must seek to eliminate uncertainty about the project. This uncertainty could relate to variables such as the optimal method of completing the project or its cost, design, or capability.
  • In attempting to resolve the uncertainty, the taxpayer must undertake a process of experimentation. Such processes may range from informal trial and error to modeling or computational analysis.
  • This process of experimentation must be technological in nature and must rely on the principles of engineering, physics, biology, or computer science.

Some defense contractors are under the erroneous belief that they cannot claim the R&D Credit if they conducted the qualified research for the benefit of a third party—in this case, the federal government. In reality, the IRS stipulates that if the agreement or contract is entered into before the qualified research is performed, the taxpayer bears the costs even if the research is unsuccessful, and the taxpayer retains some rights to the results of the research, the taxpayer company can claim the R&D Credit.

Given the substantial tax savings available, how can small and mid-sized defense contractors seize this valuable incentive? The amount of the Credit is based upon qualified research expenses (QREs), which encompass amounts spent on supplies and wages paid to employees in the conduct of eligible R&D activities. Taxpayers must provide extensive documentation, such as payroll reports, federal and state tax returns, and project lists. Many states also offer their own R&D tax credits, so businesses that put forth the effort to claim the federal incentive may easily qualify for additional savings.

Wondering if your business could minimize taxes with the R&D Credit? The experts at CRG can help you determine eligibility and guide you through the process of maximizing your savings. Contact us to schedule a pro bono analysis!

(Sources: https://defensesystems.com/articles/2016/09/16/defense-r-and-d-spending-small-vendors.aspx, https://www.irs.gov/businesses/audit-techniques-guide-credit-for-increasing-research-activities-i-e-research-tax-credit-irc-section-41-qualified-research-expenses).


What’s Next for the Expired §179D Deduction? 3 Bills Under Consideration by Congress

179D Extension Capital Review GroupUpdate: On February 9, President Trump signed into law the Bipartisan Budget Act of 2018. This new law retroactively renews the §179D deduction for 2017. Therefore, commercial building owners and primary designers may now claim the deduction for qualifying energy-efficient projects completed in 2017. At this time, however, Congress has not taken any action to extend §179D for 2018 or future years. Capital Review Group will keep abreast of Congressional activity, and we will post any further updates regarding the §179d deduction. 

Originally enacted under the Energy Policy Act (“EPAct”) of 2005, the §179D deduction has yielded substantial savings for taxpayers over the years, while benefitting the environment by incentivizing sustainable design. This popular provision offers commercial building owners or primary designers—such as architects, engineers, or contractors—a tax deduction of up to $1.80 per square foot for implementing energy efficiency measures in new or existing buildings. Specifically, the deduction is worth up to $0.60 per square foot for improvements to lighting systems, $0.60 for HVAC systems, and $0.60 for the building envelope.

Despite its widespread support, the §179D deduction has never been a permanent part of the tax code and instead has been repeatedly renewed after lapsing. The deduction most recently expired on December 31, 2016. Unfortunately, legislators have not yet taken definitive action to renew §179D, but three bills have been introduced in Congress. Here are a few possibilities for an extension or expansion of the §179D deduction:

  • H.R. 6361. Sponsored by Rep. Alan Grayson (D-FL) and introduced in the House of Representatives on November 17, 2016, this bill would extend §179D through December 31, 2018.
  • H.R. 6360. This bill was also introduced by Rep. Alan Grayson, but would only extend the deduction for one year—through December 31, 2017. At the time of this writing, no further action has been taken on either H.R. 6360 or 6361.
  • H.R. 6376. A bipartisan effort sponsored by Rep. David Reichert (R-WA) and co-sponsored by Rep. Earl Blumenauer (D-OR), Rep. Tom Reed (R-NY), and Rep. Chris Van Hollen (D-MD), this bill proposes an expansion of the §179D deduction. Previously, tax-exempt governmental entities could allocate their deductions to the primary designers of qualifying energy efficiency measures. This has allowed architects, engineers, contractors, and other designers to significantly reduce their tax burdens based on projects they have performed on public buildings. If enacted into law, H.R. 6376 would also allow 501(c)(3) nonprofit organizations to allocate their deductions to primary designers. In addition, the bill states that partnerships and S corporations would be eligible to receive an allocation of the §179D deduction—which would extend this valuable incentive to many additional small and medium-sized businesses. H.R. 6376 has been enthusiastically endorsed by the American Institute of Architects (AIA).

While the fate of these bills currently remains uncertain, many taxpayers are hoping that lawmakers will approve an extension and possible expansion of the §179D deduction. For now, building owners and primary designers can still claim the deduction for previously completed projects—but time is running out.

Have you recently installed energy efficiencies in a new or existing commercial building, or have you designed such measures for a government-owned building? Act quickly to find out if you qualify for the §179D deduction! Capital Review Group (CRG) is a leading third-party certifier for §179D claims and can review your projects for opportunities to save. Don’t miss out on this valuable incentive—contact CRG today for a pro bono analysis!

(Sources: https://www.aia.org/press-releases/24331-architects-endorse-house-legislation-expandi, https://www.congress.gov/search?q={%22source%22:%22legislation%22}).

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