Construction Accounting Article -
Contractors Get Boost From Extended Energy Tax Breaks

Target Audience: Construction Industry Professionals, Contractors, Health Care Professionals, Energy Efficient Contractors, Contruction-related Deductions Interest

At the last minute, energy tax breaks got a new lease on life in 2006, when Congress renewed construction-related deductions and credits that were set to expire in 2007. The Tax Relief and Health Care Act of 2006, signed into law Dec. 20, extended deductions for energy-efficient commercial buildings and credits for energy-efficient new homes through 2008. Here’s a look at the details.

Extensive extensions

The extended provisions originated with the Energy Tax Incentives Act of 2005, which was, in part, intended to spur new construction of energy-efficient buildings. Eligible taxpayers can take an immediate deduction for energy-saving improvements to commercial buildings, rather than depreciating the cost. To qualify, the building must be placed in service after Dec. 31, 2005, and before Jan. 1, 2009.

The improvements must be installed as part of the heating, cooling, ventilation, interior lighting or hot-water heating supply systems or in the building envelope and must achieve a 50% reduction in annual cost to the user. The reduction is measured against a reference building that meets industry standards, and it is based on overall energy savings rather than the savings generated by a specific system.

Third-party inspectors must review plans and in-place construction to determine compliance. In addition, the Department of Energy (DOE) must certify software used to determine energy savings. A list of approved software is available at the DOE’s Web site.

Generally, the deduction is for the cost of the energy-efficient improvements, up to $1.80 per square foot, though there are provisions that allow a reduced deduction of 60 cents per square foot for certain buildings that don’t meet the 50% test.

Credible credits

On the residential side, contractors are eligible for a $2,000 per home tax credit for homes they build that reduce the energy used for heating and cooling by 50% over that used in comparable homes. Builders who put up manufactured homes can qualify for a $1,000 per home tax credit for houses that save 30% on heating and cooling costs. The 30% savings is not available to builders of site-built houses.

As they must for commercial buildings, third-party inspectors and DOE-certified software are required to demonstrate compliance in residential projects. Homes must be substantially completed after August 8, 2005 — and sold after Dec. 31, 2005, and before Jan. 1, 2009 — to qualify.

Additional provisions

The 2006 extender legislation includes some other provisions that could benefit contractors. For example:

• The 15-year depreciation on the cost of leasehold and restaurant improvements, which could create more work for contractors, is extended through 2007, and

• The Work Opportunity and Welfare-to-Work credits that provide employer tax credits of up to 40% on the first $6,000 in wages paid to employees from economically disadvantaged target groups are renewed and combined for workers who start their jobs after Dec. 31, 2006, and before Jan. 1, 2008.

These and all the other extensions included in the new law are accompanied by provisions that extend IRS authority to conduct undercover operations, establish an IRS whistleblower program and increase the penalty for frivolous returns to $5,000.

Demanding details

Although the extensions are a boon to contractors, they also demand a heightened attention to detail. Sound tax advice is needed to obtain the full advantage of the new law — and to avoid running afoul of it.

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