A Bedford/Source Advisors Special Report
Practitioners learn how to maximize deductions and increase cash flow for real estate and construction clients
With a new tax landscape on the horizon, there’s never been more pressure (and more opportunities) for CPAs to help their real estate and construction clients maximize deductions and increase cash flow.
“We’re looking at some of the biggest changes to the tax regulation, code, stimulus in a generation,” observed Rick Telberg, Founder and CEO of CPA Trendlines at the recent CT Society of CPAs Virtual Real Estate Conference produced in association with Bedford Cost Segregation /Source Advisors.
“The whole restructuring of how the government takes in revenue and hands out revenue. It’s going to be bigger than the massive Tax Reform Act (TRA) of 1986 under President Reagan,” noted Telberg, adding that whatever happens under this Administration and Congress, it’s going to be different. “Even though we’re making great strides on the vaccine front, we’re still very early in the COVID economic environment,” Telberg added. “The impact will be profound on all CPAs, especially those with clients in commercial and residential real estate.”
Does the Reduction in Corporate Tax Rate Reduce the Benefits?
“Whenever we’re talking about a deduction, it is certainly impacted by the tax rate of the tax filing entity,” observed Karen Koch, CPA, Senior Director of Bedford/Source Advisors. “However, most real estate is in a pass-through entity—not a C-Corp. Most pass-through entities have not enjoyed the luxury of a low 21% tax rate. So, the impact is still pretty substantial. Even if you have a client that’s in a 25% tax bracket—the reduction of tax liability would still be greater than the lower rates that corporations enjoy.”
Koch and Telberg were among the panel of experts who shared their insights at the recent CT Society of CPAs Virtual Real Estate Conference on June 3rd produced in association with Bedford Cost Segregation/ Source Advisors.
Tax Credits for Energy Efficiency
The new Administration has made it clear that it will support incentives for reducing our carbon footprint on the planet. For instance, the §179D commercial buildings energy efficiency tax deduction primarily enables building owners to claim a tax deduction for installing qualifying systems and buildings. And it’s now a permanent provision!
Treasury released its new Green Book recently in response to the new Biden tax plan. “We’re in the process of digesting it now,” noted Greg Bryant, Senior Managing Director of Bedford/Source Advisors. “Certainly, on the energy side there are some interesting and promising things. The government is proposing to extend the §45L energy efficiency credit for five years—and they’re going to raise it another $500 per dwelling unit. Also, on the §179D front, they’re proposing to raise the commercial building energy efficiency deduction from $1.80 per square foot to $3.00 per square foot, which is very exciting news.” For the partial deduction, Bryant explained that the government is proposing to raise the deduction up to $1.00 per square foot for qualified lighting upgrades. “That’s really promising from an energy perspective and certainly reflective of the energy-efficiency sentiment within the Administration,” Bryant added.
One attendee asked the panel of investors in public Qualified Opportunity Funds (QOFs), have control over anything that would trigger a tax liability if the property were sold during the holding period?” According to Blake Christian, CPA, tax partner in the Park City, Utah office of HCVT, LLP, the answer is no, you don’t have much control over tax liability. “Most QOFs are set up as LLC’s and as an individual investor, you will likely be a limited member,” explained Christian. “You can’t control the exit. You can’t control the overall strategy.
Of the 120+ funds that HCVT has set up, Christian said most were created by family offices or other wealthy individuals who had large recent exits from earlier investment positions. “They already have experience as business operators or real estate developers,” noted Christian. “Rather than investing in other QOFs, they’d rather put their money in their own QOF and have total control over the entire process and cut out a lot of fees.
As we start to emerge from the COVID-induced recession, many worry that cash-starved cities and states are going to stick it to property owners to help pay for the massive stimulus and relief programs.
Property Tax Storm Clouds on the Horizon
Another attendee asked the panel if there’s any proactive planning that can be done for taxpayers in high property tax states like Connecticut. According to Josh Malancuk, CPA, CMI – President, JM Tax Advocates, Connecticut is an “interesting state” because we’re seeing many cases of notices being sent out before the appeal period ends in February. The window is short to react to notices if you have not prepared the appeal prior to the receipt of notice. Now is a really good time to investigate whether your property tax assessment is in line with fair market value because of that extenuating period.
For more about this topic, Josh Malancuk’s and Karen Koch’s recent article Property Tax Relief Planning During Times of COVID
Another attendee asked the panel what is the form that the government certification takes on for allocation to the primary designer?
According to Koch, it is simply called a “government allocation form” which you can Google. You can also contact Bedford/Source Advisors to obtain a generic form. You want a form that shows your project and/or purchase order number, description of the project scope, the name of the property, the address of the property and the entity that wants to claim the deduction. “Then the most important thing is to define if you are claiming 100% of the deduction (i.e. did you have design features related to all of the categories related to lighting, HVAC and building envelope) or were you only the lighting design person?”
Koch said you can allocate based on square feet, but if you have multiple vendors around the table, “you might not want to allocate based on square feet because lighting for example may cover the whole building. Instead you want to allocate based on your percentage of the benefit,” added Koch.
For example: If you did 60% of the allocation of the energy efficient equipment based on your P.O. or contract, you have to know the scope around the table. But the government entity can allocate it on any form that they want. They can name as many vendors as they want if they think they are each primary designers.
Encourage your clients to explain to the government entity that they have spent considerable time and energy developing to a higher level of technology with greater energy savings and higher performance of the equipment installed. Government entities sometimes have a hard time understanding why they should give your client a deduction. They need to be able to measure and validate the real difference that they’re bringing to the bottom line.
Impact on 1031s and Opportunity Zones
According to Bedford’s Bryant, there’s not great news on the horizon for 1031 exchanges, since the Biden tax plan really wants to rein those in. “It’s probably going to change the dynamics in terms of how people conduct their transactions. But with bonus depreciation available at the 100% rate for assets with a MACRS recovery period for 20 years or less for the next couple of years, that could certainly soften the blow for replacement property,” Bryant explained.
It remains to be seen how people react to that. We’ve had a lot of clients concerned about these potential changes. Everyone’s waiting.
According to HCVT’s Christian, the Opportunity Zone program will be a safety net for “blown” 1031s. “After the aforementioned Green Book came out, the White House announced they’re planning on retroactivity for capital gains after April 28, 2021,” noted Christian. “Congress must approve that and the rates, but they have certainly drawn a line in the sand.”
Construction and Engineering Firms CAN Take Advantage of R&D Tax Credits
“Look for any time in which there is investment in efficiency or whenever you are stepping outside the comfort zone of the normal design and build,” explained Max Vignola, CCSP, Director Technical Sales R&D Services, Bedford/Source Advisors. “A lot of the trends are going toward space utilization. Even when it comes to cross country travel, remote working and designing motor homes and vans. The engineering solutions that some of these companies are getting into is truly innovative and should qualify for valuable credits,” noted Vignola, such as the engineering analysis required to determine how to fit four people into a van, with sleeping space, cooking devices, etc. Different technologies must be incorporated. “Most people don’t think of these design problems as R&D qualifying activities, but they can be if you’re trying to create something new or innovative for you customers—a new feature/benefit,” added Vignola.
“I can’t tell you how many times we run into clients who are doing truly innovative things and don’t realize they could be claiming valuable R&D credits for doing so,” remarked Bedford’s Koch. We’ve found that just about every company has some unique software development. In working with your clients, help them understand how they write their contracts. So, if they out there purchasing, they could have a vendor who’s developing the software, but you want to make sure your client is considered “at risk” and they’re writing these contacts so they can qualify for the credit.
Someone is going to get the credit along the value chain; make sure it’s your client and that they’re considered ‘at risk’ for doing it. There is some uniqueness that Max and I always look for when reviewing our clients’ contracts.”
With one of the most significant tax overhauls in a generation coming on top of building supply-chain and labor shortages and a rapidly accelerating post-COVID economic rebound, CPAs have an unprecedented opportunity to provide value to their real estate and construction clients. For practitioners who stay ahead of the curve, we know you’ll be ready for the challenge.
In addition to events held earlier this month with the Connecticut, Virginia and Texas state societies of CPAs, the Bedford/Source Advisors Real Estate Conference Series continues with three more appearances in June:
- Ohio Society of CPAs Real Estate Conference: June 22
- Missouri Society of CPAs Real Estate Conference: June 24
- Minnesota Society of CPAs Real Estate Conference: June 29
Presenters (alphabetically) include:
- Andy Ackermann – MCM CPAs and Advisors
- Greg Bryant, CCSP, Senior Managing Director, Bedford/Source Advisors
- Blake Christian, CPA/MBT Tax Partner, HCVT, LLC
- Karen Koch, CPA, MT, Senior Director, Bedford/Source Advisors
- Stephen Lukinovich, CPA, PFS, CVA – MCM CPAs & Advisors, LLP
- Josh Malancuk, CPA, CMI – President, JM Tax Advocates
- Rick Telberg, Editor in Chief, CPA Trendlines
- Max Vignola, CCSP, Director Technical Sales R&D, Bedford/Source Advisors