Tax Incentives & Credits for Construction Contractors

Over the last few months, construction companies and contractors have faced new uncertainties impacting their businesses. The Trump administration’s announcement of tariffs on lumber, aluminum, steel, and certain minerals has caused an increase in the price of raw materials and other construction materials. In fact, a recent survey by the Associated Builders & Contractors found that 80% of contractors will experience price increases in the coming months. Given this reality, industry companies should consider new ways to generate additional income and control costs. One way to do this is through claiming federal tax incentives to reduce taxes. To help clients, prospects, and others, JLK Rosenberger has summarized the key saving opportunities below.

Section 179d Energy Efficiency Deduction

The Energy Efficient Commercial Buildings Deduction is available to commercial property owners and to those primarily responsible for designing qualifying facilities. To claim the deduction, projects must either involve new construction that incorporates approved energy efficient systems or retrofit existing buildings with eligible upgrades. Qualifying components may include interior lighting, HVAC systems, hot water heaters, and improvements to the building envelope. Importantly, these systems must achieve specific reductions in energy use, as defined by ASHRAE Standard 90.1-2019, to meet eligibility requirements.

The amount of the deduction that can be taken depends on two factors: the amount of energy saved and whether the prevailing wage and apprenticeship (PWA) requirements were met when constructing the energy efficient building. The savings amount (indexed for inflation) is $.50 per square foot, with 25% energy savings with an additional $.02 per square foot when savings exceed 25%. The maximum is $1.00 per square foot for a building with a 50% or greater energy deduction. When PWA requirements are met, the maximum benefit increases to 5 times the base savings per square foot.

To claim the credit, a study of the project must be completed by a third party to determine the applicable energy savings. Typically, IRS-approved software will be used to model energy performance and compare the updates against those of reference buildings. The third-party will also physically visit to verify the improvements meet the required standards. Finally, they will issue the necessary documentation, including the certification needed to claim the deduction.

Work Opportunity Tax Credit (WOTC)

This federal tax credit is available to construction companies that hire workers from certain disadvantaged groups. There are ten eligible groups, including certain veterans, ex-felons, designated community residents, summer youth employees, supplemental security income individuals, and long-term family assistance recipients. To be eligible, workers hired from eligible groups must be certified by a state workforce agency. Only eligible wages paid to certified workers before December 31, 2025, qualify.

Typically, the credit equals 40% up to $6,000 of wages paid to a worker in the first year of employment who is certified as a member of a targeted group and performs at least 400 hours of service. The maximum credit amount is $2,400 per worker. A 25% rate applies to individuals who work less than 400 but at least 120 hours. It is important to note that the credit cannot be claimed on re-hired employees and can only be used to offset business income tax liability or Social Security taxes owed.

Section 45L Tax Credit

This federal tax credit of up to $5,000 per home is available to eligible contractors that substantially reconstruct or build new energy efficient homes. The amount of the credit depends on specifics such as the type of home, energy efficiency achieved, and date when leased or sold. The available credit by home type includes:

• Single Family Homes – $2,500 available for homes certified to eligible ENERGY STAR Single-Family New Home (SFNH) program requirements.
• Manufactured Homes – $2,500 available for homes certified to eligible ENERGY STAR Manufactured New Home (MH) program requirements.
• Multi-Family Homes – $500 available for homes certified to eligible ENERGY STAR Multi-family New Construction (MFNC) program requirements. Additional savings may be available for those contractors that meet prevailing wage requirements.

An eligible contractor is an individual who constructed the home, owned and had a basis in it during construction, and sold/leased it for use as a primary residence. In the case of a manufactured home, it is the person who produced the home and owned/had a basis in it during production. It is important to note if someone owns a home but hires a third party to construct it, then the person who hired the contractor is considered the eligible contractor. In all cases, a house that is not considered to have been acquired is used as a primary residence by a contractor.

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Construction companies may be eligible for a variety of federal tax incentives, along with additional opportunities at the state level, depending on their location. Companies can reduce overall federal taxes by taking advantage of these opportunities, freeing up the capital for other needs. If you have questions about the information outlined above or need assistance with an accounting or tax issue, JLK Rosenberger can help. For additional information, call 949-860-9902 or click here to contact us. We look forward to speaking with you soon.