New Construction Tax Credits You Haven't Heard Of Yet (2023)

Today, we’re tackling one of the most common questions we get as construction accountants: 

“How much money can you save me from the government this year?”

And we love this question. 

After all, it’s our job to help you make and keep, as much money as possible in your business. 

It's always a good idea to stay informed about the latest tax implications, especially if you're in the construction industry. Keeping up with these changes can help you save big bucks and adapt to the evolving landscape.

In 2023, there are actually a number of tax credits available that can benefit both individuals and businesses. 

In this blog, we’re going to dive into all of the new construction tax credits that you can utilize in your business to save money this year. 

Who says taxes can’t be fun? Let’s dive in. 

What Are Construction Tax Credits?

First things first, let’s chat about what construction tax credits are. 

Construction tax credits are incentives provided by the government to encourage businesses and individuals to pursue sustainable construction methods. 

These credits help offset the cost of incorporating energy-efficient technologies into the building process. 

By reducing the financial burden of incorporating eco-friendly features, more builders can afford to pursue sustainable construction. 

In other words, construction tax credits allow you to maintain higher cash flows so that you can continue running your business in all its glory, given that you’re willing to implement some green-building strategies. 

Some of the construction tax credits that your business may be eligible for include:

Residential Energy Efficient Property Credit

• Non-business Energy Property Credit
• Alternative Fuel Vehicle Refueling Property Credit
• 45L Tax Credits

‍New Construction Tax Credits in 2023 To Know About

The Inflation Reduction Act (IRA)

Several tax credits that we’re going to talk about stem from the recently passed Inflation Reduction Act, or IRA. 

The Inflation Reduction Act of 2022 was signed into law last August with the goal of reducing carbon emissions by 40% by 2030, while also promoting domestic energy production and manufacturing.

Here are a few of the new and/or expanded tax credits under IRA: 

‍179D Energy Efficient Commercial Buildings Deduction

Thanks to the Inflation Reduction Act of 2022, commercial building tax deductions under Section 179D of the Internal Revenue Code have expanded.

Beginning in 2023, you will be able to take deductions for building projects that improve energy efficiency by 25%.

This is much more realistic than the previous 50% target. 

Additionally, the deduction amount increases for every percentage point above 25%. 

Qualifying construction and improvement projects can earn an additional deduction of up to $5.00 per square foot, as long as they meet prevailing wage rates for the area and minimum apprenticeship requirements. 

Pretty good, right? 

Retrofits may also qualify for an alternative Section 179D deduction if placed into service under a qualified retrofit plan and show at least a 25% decrease in energy usage when compared to the usage five years prior.

Finally, one of the best parts of the Act is that tax-exempt building owners, like nonprofits and tribal entities, can now allocate deductions to the architects, engineers, and building design contractors who play a crucial role in designing energy-efficient systems for their buildings.

45L Tax Credits

Next, let's talk about the 45L Tax Credit. 

This is a federal tax credit that rewards multifamily developers, investors, and homebuilders for building energy-efficient homes and units. 

Basically, if you develop and sell or lease out a home or unit that meets certain energy efficiency criteria, you could be eligible for a tax credit of up to $2,000 per dwelling unit.

But here's the exciting part - starting in 2023, thanks to the Inflation Reduction Act, the tax credit amount increases to as much as $5,000 per dwelling unit!

And it's not just limited to low-rise residential developments anymore. All residential developments that meet certain energy efficiency criteria are now eligible.

So who's an ideal candidate for these tax credits? Any apartment building, residential condominium, or single-family home developer can be assessed for energy tax credits.

And if you're planning on doing some substantial reconstruction or rehabilitation work on an existing building, you might also be eligible.

It’s important to note that the new 45L rules apply to qualified energy-efficient homes acquired after December 31, 2022, and before January 1, 2033, for use as a residence during the taxable year.

New Homeowner Credits for Energy Efficiency

The last two amended tax credits that we’re going to talk about are geared toward homeowners. 

TIP: As a builder or contractor, you can take advantage of the credits by educating your customers about the tax credits, and encouraging them to build. 

The Energy Efficient Home Improvement Credit and Residential Clean Energy Property Credit are two tax credits that encourage homeowners to make energy-efficient improvements to their homes. 

The Energy Efficient Home Improvement Credit has historically been a credit of up to $500 for qualifying expenditures made through December 31, 2022. 

Now thanks to IRA, starting on January 1, 2023, the credit is equal to 30% of the sum of amounts paid by the taxpayer for certain qualified expenditures, up to a maximum of $1,200 per year.

And it’s available through January 1, 2033!

The Residential Clean Energy Property Credit is a 30% credit for certain qualified expenditures made by a taxpayer for residential energy-efficient property, including solar panels and wind turbines. 

The credit has been extended through 2034 and now includes battery storage technology as an eligible expenditure. 

It’s important to note that the credit percentage rate will gradually decrease to 22% for properties placed in service in 2024.

R&D Tax Credit

The R&D tax credit is another tax credit you may not know exists. 

It’s a federal tax incentive that encourages businesses to invest in research and development activities. 

Many people think that this credit only applies to high-tech or scientific industries, but that's not true! 

In fact, construction businesses can easily qualify for the R&D tax credit if they are developing new or improved construction techniques, materials, or designs.

For example, let's say your construction business is working on a project to build a new type of sustainable building. 

During the project, you encounter several technical challenges related to the design and construction process. 

To overcome these challenges, you need to conduct research and experimentation to find innovative solutions.

Under the R&D tax credit, the costs associated with this research and experimentation can be eligible for a tax credit. This can include expenses related to employee wages, supplies, and even subcontractor costs.

Though like most other credits out there, the R&D activities must meet specific criteria for the credit to come into play. 

The research must create new or improved products, processes, or software that significantly advance the industry, and it must involve a degree of technical uncertainty, meaning that you can’t just slap some glitter onto an existing product and call it a day. 

Here are a few more examples of activities on the job that may qualify:

• Designing and developing new techniques with an alternative structure
• Using new materials or processes that have never been attempted before due to technical risks
• Development of construction solutions to reduce time and site
• Identify and adapt new tools or equipment to improve efficiency and reduce environmental conditions
• Modifying existing processes or techniques 

And lastly, the research must be conducted in the United States, accompanied by documentation to support the R&D activities.

As documentation is key, we recommend working with your dedicated construction accountant to ensure that you are taking advantage of this lucrative tax credit. 

Employee Retention Credit

The last tax credit that we’re going to discuss for construction businesses in the Employee Retention Credit. 

As we all know, Covid-19 pandemic took a drastic toll on the well-being of both businesses and their employees. 

The Employee Retention Credit is a tax credit that was introduced back in 2021 to help negate the financial repercussions incurred by businesses affected by the pandemic by rewarding employers who retained staff amidst the crisis. 

This credit, which can be retroactively claimed in 2023, reduces payroll taxes owed for each employee retained during the pandemic by up to $7,000 per employee.

So, if you ran a construction business that was adversely affected during the pandemic (i.e. hours were reduced, jobs were lost, etc.) and you retained any employees, then you very likely qualify for the Employee Retention Credit, which has seen many construction companies get back tens of thousands if not hundreds of thousands of dollars, back in cash from the IRS. 

If you think you might qualify, we strongly recommend getting in touch with a qualified construction accountant today. 

How Can You Receive The Tax Credits?

The process in which you go about getting the tax credits mentioned today depend on the tax credits themselves. 

Some tax credits, such as the Energy Efficient Home Credit, require specific eligibility requirements. 

Others, such as the R&D Tax Credit, require businesses to document their research and development activities. 

Though these won’t be automatically implemented upon your business (because then we’d be out of a job), you can do your due diligence in identifying the ones that best apply to you and applying for them as necessary.

However, if you fancy handing over the hardship of tax credit acquisition, you can partner up with an experienced accounting firm (hello?) that’d be more than happy to help you navigate the process and ensure that you receive all the credits that you are eligible for.

Ready To Get More Help? 

Here at Atlas Accounting Group, we help construction businesses of all kinds improve their financial literacy and ultimately, grow more profits. 

Unsure of your break-even numbers? Not sure about your operating goals? 

That’s what we’re here for. 

We’re accountants who don’t just want to maintain your finances. We want to help grow them. 

If you’d like to see how we can help improve your construction business, and save more money this year, you can book a complimentary call with us anytime. 

Until next time! 

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