The 2021 omnibus spending bill approved by Congress in December includes enhancements to three key tax incentives that are advantageous to architects and developers. AIA partner Engineered Tax Services explains what you need to know to take advantage of the benefits.
Congress approved a combined 2021 omnibus spending bill in December, which includes an additional $900 billion in funding for COVID-19 relief. Architects should take particular note of three changes that enhance their ability to receive valuable tax credits and deductions.
1. 179D Energy-Efficiency Tax Deduction
In early 2020, architects received good news with the extension of the 179D Commercial Building Energy-Efficiency Tax Deduction. The 26 U.S.C. § 179D deduction is intended to incentivize the design and installation of energy-efficient building systems as well as energy conservation in high-rise multifamily projects and commercial buildings. The 179D deduction can be allocated to the architect who designed the technical specifications for a public entity. The IRS permits this deduction to be allocated to the architect or designer to incentivize energy efficiency and conservation in public spaces.
After being renewed year upon year, the 179D tax deduction has now been made permanent by Congress. This is great news for architects, who can plan for growth and better determine cash flow knowing they can count on the 179D deduction for qualified projects.
However, Congress also updated energy standards, which could make it more challenging to qualify for the deduction. Instead of using American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) Standard 90.1-2007, energy updates will be held to ASHRAE and Illuminating Engineering Society (IES) standards that are in effect two years before construction begins. Architects should be aware of the changes and plan to provide their specialty tax service professionals with project blueprints along with their project requests. Engineered Tax Services, for example, is a licensed engineering firm specializing in this type of energy modeling related to IRS tax requirements and offers a complimentary benefit analysis and quotes for certification.
Despite the stricter energy standards, the 179D deduction will continue to be one of the best tax incentives for architects and property owners.
2. 45L Energy-Efficient Home Tax Credit
The 26. U.S.§ Code 45L for energy-efficient homes allows a tax credit for qualified new energy-efficient homes and low-rise multifamily projects. This tax provision allows developers to take a tax credit of up to $2,000 for qualified, energy-efficient residential units or dwellings on properties, including single-family homes, condominiums, townhomes, and apartments. Unused credits can be carried over for up to 20 years. To qualify, dwelling units must provide a level of heating and cooling energy consumption that is 50% less than the 2006 International Energy Conservation Code (IECC) Standards, and a minimum of 10% must come from the building envelope.
The 45L tax credit has been extended for one year, through 2021. Developers can also claim retroactive credits for 2018 and 2019 if they were missed on past returns. Any unused credits can be carried over for up to 20 years.
Engineered Tax Services offers a complimentary Builder's Guide to the 45L Energy Tax Credit, which architects and builders can use to evaluate a property’s qualifying ability and to proactively consult with clients during the design process for capturing this valuable tax credit.
3. R&D Tax Credits and PPP Loans: Double-Dipping?
The Research and Development Tax Credit is a permanent federal tax incentive meant to stimulate innovation, technical design, and manufacturing. Architects and designers may be able to save tens of thousands of dollars for activities they are already conducting, such as extensive research, including schematics, conceptual design, and design development.
The Paycheck Protection Program (PPP) was funded as part of the CARES Act to provide forgivable loans for qualified businesses adversely affected by the COVID-19 pandemic. At least 60% of the loan must be used for employee wages. PPP loans were specifically excluded from taxable income; therefore, the IRS did not consider forgivable loans to be tax-deductible as business expenses. This made things rather uncertain for businesses wishing to qualify for R&D tax credits. In other words, if salaries couldn’t be deducted against taxable income, could they be used to calculate R&D tax credits?
As part of the new COVID-19 relief legislation, businesses may deduct expenses paid with PPP proceeds. This is significant for architectural firms that are eligible to receive R&D tax credits. First, employers no longer have to be concerned about whether payroll costs funded with PPP loans will be deductible at year end. The new legislation clarifies the treatment of business expenses for those businesses receiving PPP loans that are forgiven—they now qualify for a deduction. As such, these expenses can be used for calculating payroll-based R&D expenses used for calculating the R&D tax credit. Now that the conflict has been resolved, architects can work with their specialty tax advisors to qualify for the tax credits they have earned.