Builders and developers eagerly awaiting the end of rising interest rates have endured several false starts. Indeed, the most recent inflation data for December underlined the stubbornness of the current inflation trend with a slight increase. This is particularly unwelcome as the Federal Reserve only recently announced its intention for up to three rate cuts in 2024. The impact of the latest inflation data remains to be seen, but considering their oft-reiterated 2% inflation target, it wouldn’t be shocking for the Fed to rethink its path forward.
Even amid economic uncertainty, there is one tried-and-true method developers and property owners can greatly impact their bottom line — the exploration and identification of tax deductions, credits and abatements.
Several favorable tax incentives and credit programs are available to owners and developers, and all too often, are not fully taken advantage of by taxpayers. Here are a few tax programs that could prove advantageous for taxpayers in 2024.
Bonus Depreciation
The Tax Cuts and Jobs Act (TCJA) included a statute stating that qualified purchases made between September 27, 2017, and January 1, 2023, were eligible for 100% bonus depreciation. That fell to 80% in 2023 and declines to 60% for 2024. From here on out, the bonus depreciation rate only falls further at 20% per year until it is eliminated after 2026 unless Congress acts to continue the deduction. It may be too late to claim full bonus depreciation, but we can all agree that 60% bonus depreciation is too tempting to pass up.
What’s more, the TCJA also expanded the properties eligible for bonus depreciation to include used and newly qualified properties.
Expanded Energy-Efficient Commercial Buildings Deduction
IRS Section 179D was subject to a substantial expansion under the Inflation Reduction Act. Owners of qualifying commercial properties and multifamily buildings of four stories or more meeting energy-efficiency standards may be eligible for tax deductions of up to $5 per square foot. That’s a significant increase from the $1.88 maximum deduction per square foot under the prior version.
To qualify, taxpayers must meet wage and apprenticeship requirements and contract an independent engineering firm to certify that improvements to the qualifying property’s lighting, building envelope and HVAC systems have resulted in significant energy efficiency improvements.
Historic Preservation Tax Incentives
The Historic Tax Credit (HTC) is a federal tax incentive program in the United States designed to encourage the preservation and rehabilitation of historic buildings. The program provides a 20% credit on federal income taxes for qualified expenditures incurred in the process of rehabilitating historic structures.
Each year, the Technical Preservation Services, the agency responsible for administering the program, approves approximately $6 billion in credits stemming from private investment.
To qualify as a historic building, a property must be listed in the National Register of Historic Places or located within a historic district, retain “historic integrity” as designated by the National Park Service and date back to a “period of significance.” Building owners can apply for their properties to be deemed a certified historic structure through the National Park Service’s website.
Additionally, qualifying renovations must pass a substantial rehabilitation test, and the work must comply with the Secretary of the Interior’s Standards for Rehabilitation.
New Market Tax Credit
The New Market Tax Credit incentivizes investment in distressed communities. It also expires on December 31, 2025, so time is running out. Still, the credit is worth a careful look as its value amounts to 39% of the original investment, claimed over seven years. The program works like this: private entities invest in Community Development Entities (CDEs), which, in turn, qualify individuals and corporations to claim a federal income tax credit. According to the Community Development Financial Institutions Fund’s website, the program has financed nearly 11,000 businesses.
Of course, each of these programs can be nuanced and complex and impact your overall tax position. That’s why it’s so important to have a dedicated team of industry professionals on hand to assess your unique tax circumstances.
