If your company’s revenues have been reduced by the COVID-19 pandemic, you may be able to increase cash flow by claiming several federal and state tax credits and incentives.
R&D Tax Credit
The U.S. government and two-thirds of U.S. states offer research and development (R&D) tax credits. Many companies mistakenly believe that these credits are only available for scientific and technical research projects. However, many types of activities qualify for the R&D tax credit, such as developing or formulating new or improved products or processes; fundamentally enhancing existing products or formulas;
applying for patents and prototyping; and assisting customers with technical problem solving. These activities don’t need to be new to a company’s industry, but only new to their business.
Businesses across numerous industries are eligible to claim the R&D tax credit, yet less than one-third of eligible companies realize they may qualify, or take all the credits for which they are eligible. Qualifying businesses include manufacturers, injection molding companies, tool and die shops, software developers, food processors, chemical companies, architectural and engineering firms, construction contractors, food processors, agribusiness and textile and apparel companies.
Another way to increase your near-term cash flow is to undertake a cost segregation study to accelerate depreciation and gain a tax deferral. This federal income tax tool increases your near-term cash flow by utilizing shorter recovery periods to accelerate the return on capital from your investment in property. The components of your building can be properly classified through a cost segregation study into shorter recovery periods for computing depreciation, regardless of whether the building is newly constructed, purchased or renovated. The study carves out (into five, seven and 15-year lives) certain qualifying portions of your building that are normally buried in 39-year or 27.5-year categories.
Section 179D Tax Deduction
Energy-efficient improvements made to your company’s building also may be a way to increase cash flow. The 179D tax deduction applies to companies that reduce total annual energy and power costs for interior lighting systems, heating, cooling, ventilation and hot water systems by 50%. Recent legislation extended this deduction to the end of 2020 and made it retroactive to 2016.
The 179D tax deduction is available for new building construction and energy renovations on existing commercial buildings as well as apartment buildings of four or more stories. The building may qualify for up to $1.80 per square foot ($.60 per square foot for each system) and partial deductions are allowed for lighting projects. To claim the deduction, the energy efficiency project must be certified.
Section 45L Energy-Efficient Tax Credit
Lawmakers also extended the 45L Energy Efficient Tax Credit through the end of 2020. Developers of energy-efficient residential buildings can take advantage of this tax credit, which equals $2,000 per residential unit or dwelling on qualifying properties including apartments, townhomes, condominiums and single-family homes. Each residential unit should provide a level of energy efficiency that is higher than national energy standards. Qualifying properties must be three stories or lower, and construction must incorporate energy efficient features such as high R-Value insulation and roofing, windows, doors and/or HVAC systems.
Call on the Specialty Tax Expertise of ETS
The specialists at Engineered Tax Services have substantial expertise in all aspects of tax credits, incentives and cost segregation studies. We draw on the in-house expertise of our tax attorneys, CPAs and engineers to conduct thorough and yet non-invasive analyses to identify all eligible R&D tax credit activities and qualifying expenditures under Sections 179D and 45L. We are experienced in providing Energy Policy Act tax certifications for thousands of companies across many industries. We can help you improve your company’s cash flow by uncovering the greatest possible potential tax savings available.
If you have questions about how you could benefit from tax credits and incentives during these challenging times, please call Engineered Tax Services at (800) 236-6519.