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Tax Incentives

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5 Reasons Cost Segregation is Important

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Higher profitability, lower tax liability, and increased cash flow are the three primary factors which make cost segregation so important. In addition, lower taxes and increased cash flow mean plans for the business can be crystallized and implemented more easily. Cost segregation is, therefore, part of the bedrock of success for real estate investors and developers.

Cost Segregation in Practice

Constructing, renovating, remodeling, and acquiring real estate for commercial use typically result in depreciating those assets over a 27.5- or a 39-year period. The timescale depends on whether they are residential (apartment blocks, single family homes, etc.) or commercial (shopping malls, hotels, warehouses, etc.)

By identifying specific, and IRS-approved, components that can be segregated from the rest of the real estate they can be allocated to accelerated depreciation categories. The three primary categories are land improvements, specific additions to the building’s core structure, and personal property. Those components may then be written off in 5, 7, or 15 years.

It is possible, therefore, to reduce income tax liability by up to $70,000 for each $1,000,000 of building cost basis owned. Specific savings are based on a detailed cost segregation analysis applying IRS-approved standards.

Making Use of Cost Segregation in Business

1. Simple Depreciation Acceleration

When a piece of real estate is constructed or acquired, there is usually a minimum time span before its value will increase enough for it to be sold at a profit. Maintaining the property generates costs; those costs should obviously be less than the corresponding income. Property and income taxes become payable. The amount of tax due is usually reduced by the 27.5- or 39-year depreciation write-off approach.

Cost segregation enables tax liability to be reduced. By shifting depreciation of approved components from 27.5 or 39 to 5, 7, or 15 years, that accelerated depreciation reduces each year’s tax liability. By reducing tax payments, cash for running costs, and capital for further investment is automatically generated. It does not have to be borrowed, attracted by exchanging company stock for new investment, or for corporate plans to be delayed.

2. Partial Asset Disposition

If the property is being renovated, then some components will be removed and replaced with new and improved components. The old and the new components will be depreciated. Unless partial asset disposition (PAD.) is taken, double depreciation of those old and new assets accumulates. This will impact recapture tax calculated at ultimate sale. By having previously segregated components into different asset classes, the recapture tax is reduced.

3. More Availability Means Greater Benefit

Cost segregation was once used, primarily, by major corporations. Today, properties with a cost basis in the hundreds of thousands as opposed to the tens of millions of dollars now qualify for accelerated depreciation. This, on its own, makes the principle both viable and important for the smaller investor or developer.

4. The Time Value of Money

A simple advantage of applying a cost segregation strategy is that money available today is worth more than ultimate profit made available at eventual disposition. By accelerating depreciation, even by a small amount on lower-value properties, cash flow improves. That cash becomes available for both running costs and for growth. When used for growth by investing in additional properties, components in those new properties can also be subject to accelerate depreciation, thus magnifying the benefit.

5. Cost Segregation and 1031

Relinquishing and acquiring real estate benefits from capital gains tax deferrals when managed via a 1031 Exchange. The increased profit generated by segregating costs is not, therefore, necessarily subject to immediate taxation payable on sale. All the tax can be deferred.

Personal as well as corporate investors can, by making use of The Tax and Jobs Act legislation, eventually avoid paying that tax if, when they move out of active property ownership, they reinvest in approved development zones. After an amount of time, the deferred tax is forgiven. The benefits of cost segregation can, therefore, be “held” indefinitely, and the benefits of recent legislation are increased.

The Takeaway

Cost segregation is important. It enables a business’s profit to increase and cash flow to improve by accelerating the depreciation on real estate components. The immediate and long-term benefits make it a crucially important strategy for real estate investors and developers. Completing cost segregation analyses correctly and to IRS standards demands competence in specific areas of real estate, and experience in tax law. To discuss how you can make use of this strategy, please click here to contact us.

new markets tax credit

Investing and the New Markets Tax Credit

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Traditionally, the New Markets Tax Credit was claimed by investors comprised of large corporations or financial institutions. It is possible, however, for individuals, and even the Community Development Entities (CDEs), to invest themselves. Investor capital reaches financially distressed areas via the qualified CDEs in that locale.

The New Markets Tax Credit Encourages Economic Growth

A business or entity applies with the Community Development Financial Institutions Fund (CDFI) to become a certified Community Development Entity (CDE). Once this is achieved, the CDE can apply for tax credits with the Department of the Treasury. The Community Development Financial Institutions Fund is a bureau in the Treasury Department. This bureau oversees the allocation of the NMTC. There are several steps to becoming a certified CDE, but your business or institution may already qualify.

Many financial institutions and businesses are already certified CDFIs or SBICs. These two designations automatically qualify such companies and institutions as CDEs. Community Development Financial Institutions are usually community credit unions or banks. They are already helping provide access to lending for underserved communities. Specialized Small Business Investment Companies are companies designed to increase small businesses’ access to investment in low-income areas, which is also the aim of the NMTC.

Once the CDE has applied for credit with the U.S. Treasury, they can align investors with business projects in their community. The capital is invested in the CDE in exchange for the NMTC which the investor can claim against their federal income tax owed. Private entity CDEs efficiently and fairly extend this funding and recruit investment to meet the needs of the qualifying projects they choose within their communities. The recipients of the funding are designated as Qualifying Active Low Income Community Businesses or QALICBs.

Changes to the New Markets Tax Credit (NMTC)

The most recent change to the NMTC came in December 2019. Through the Fiscal Year 2020 appropriations bill H.R. 1865, President Trump signed into law a $5 billion extension of the NMTC. Designed as a one-year extension, it was a prescient move for the President. Businesses and communities were hit hard by the Coronavirus pandemic that came with the new year.

According to the New Markets Tax Credit Evaluation, investors are able to claim up to 39% income tax credit on their investment. $12.9 billion dollars were allocated in 9 rounds, over the first eight years of the program. This equals out to about $1.5 billion per allocation round. The recent extension will significantly increase that allocation amount at a time when communities and QALICBs need it most. 

Paul Anderson, of the NMTC Coalition, reported that funding for 2019 was $3.5 billion. As the program has continued to receive extensions, the allocation amount has increased. Many businesses and projects are in dire need of funds. Certain changes made to the NMTC Compliance FAQs were made in response to the Coronavirus pandemic.

Communities Become Candidates

The United States Census determines in large part which communities can qualify to receive NMTC qualifying investments.  Communities are judged to be qualifying investment opportunities by census poverty level. Some communities qualify because of their status as a “targeted population.” A population can receive this designation because of natural disaster as was the case with Hurricane Katrina and the subsequent Gulf Opportunity Zones

The New Markets Tax Credit intends to help underserved communities, devastated communities, and investors simultaneously. In 2004, the American Jobs Creation Act defined targeted populations in Subtitle C: Community Revitalization. It also set a precedent for identifying potential QALICBs, 

Americans have benefited from CDFI funding for almost two decades. In July 2020, the CDFI Fund awarded $3.5 billion in New Market Tax Credits. This amount brought the allocations awarded to a total of $61 billion. Contact us for more information on how your business can invest in America. 

business tax credit

How the Empowerment Zones Program Could Help Your Business

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In 1993, Congress passed the Empowerment Zones and Enterprise Communities Act to alleviate poverty in certain regions across the country. The program targeted six strategic cities: New York, Chicago, Atlanta, Baltimore, Detroit, and Philadelphia-Camden. The goal was to uplift the lives of poor communities living in these regions.

The Empowerment Zones program, albeit ambitious, seems to have been forgotten. Here is a brief overview of the fundamental details of the EZ program and how it might apply to your business.

Qualification Requirements for Communities

The Empowerment Zones program was intended to rejuvenate strategic economic regions that were experiencing a decline in growth – Detroit is an excellent example. The program planned to incentivize the private sector to set up businesses in these locations and, by doing so, spur long-term economic growth.

The main requirement for a community to qualify for designation as an Empowerment Zone was a clear economic distress demonstration. Qualifying factors supporting economic distress included:

  • High unemployment levels
  • A poverty rate of at least 20%
  • A declining population rate
  • A clear pattern of divestment by existing businesses

Additionally, these communities had to clearly demonstrate the potential for economic development, which essentially is the program’s main goal. The government considered several factors when gauging these communities’ potential for economic improvement. The main consideration was a community’s capacity to build public-private partnerships. These communities were also required to help provide the necessary private and public resources to help support the economic rejuvenation efforts.

The Application Process

Communities that met the set qualifications were required to apply with the federal government. One of the application requirements was backing by the communities’ local and state governments. This was required to ensure that qualifying requirements received as much support as they needed.

Another important requirement was the submission of a strategic development plan based on the EZ program. The plan had to include the input and insight of all involved parties, including community members, businesses, NGOs, and government institutions. Finally, the communities had to provide a baseline of benchmark goals and measurements to gauge the program’s progress and achievements.

Requirements & Incentives for Businesses

The federal government planned to spur economic growth in these communities by offering tax incentives to businesses who were willing to set up shop there. For starters, businesses were offered a 20% wage credit for the first $15,000 paid in wages to an employee – the employee had to be a resident of the empowerment zone.

In addition to residents of the empowerment zones, businesses also had the option of hiring target employees in exchange for a 40% tax credit on each of these employees’ first-year wages totalling $6,000. Target employees were considered some of the more vulnerable members of the community, including at-risk youth, vocational rehabilitation referrals, SSI recipients, and food stamps recipients.

Businesses that contributed to physical developments in these communities also stood to benefit greatly from subsidized capital expenditures. Under the program’s Round III stipulations, capital expenditure on equipment erected on land parcels within these communities would depreciate by up to $35,000.  

Outcomes of the Federal Empowerment Zones Program

Results of the EZ program were mixed and largely inconclusive. However, there were more positive outcomes than negative ones. For example, five of the six empowerment zones realized an increase in jobs and a boom in minority-owned businesses. However, the incentives were more attractive to large organizations than small businesses. It should also be noted that the program coincided with an economic boom across the country.

Several other programs have been modeled after the Federal Empowerment Zones program of 1993 with the same intention. It is up to the communities and businesses to keep track of these programs and take advantage of whatever they have to offer.

Contact us today to help you learn more about federal empowerment zones, and how your business could benefit from this program.

federal empowerment zones

What Are Federal Empowerment Zones?

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Federal Empowerment Zones (EZs) are areas within the United States that are economically depressed. Communities that had poverty rates of at least 20% coupled with high rates of unemployment were designated EZs. In addition to high poverty and unemployment rates, the qualified communities also exhibited a high rate of emigration.

History of Federal Empowerment Zones

The Empowerment Zones and Enterprise Communities Act of 1993 made EZs possible. It made incentives available to businesses through the tax code. The act provided bonding authority for infrastructure development. Infrastructure improvements were seen as crucial to business growth and revitalization. A generous grant program was also provided, ensuring that distressed communities had the funding they needed to stimulate their economies.

Since the early 1990s, developments have been through legislation amending the original act. National competitions were held which allowed qualifying communities to compete with each other to gain designation as Empowerment Zones, Enterprise Zones (ECs), and Renewal Communities (RCs). All of these designations were designed to aid the economies of highly distressed communities.

Qualifying communities showed extremely high unemployment, poverty, and emigration rates. These same communities had to have regrowth potential. The aid meted out to EZs, ECs, and RCs indirectly benefited businesses through funds spent on infrastructure improvements. Businesses were eligible for employment tax credits of up to $3,000 per employee. These incentives encouraged business owners to hire within the Empowerment Zone because only wages paid to employees living and working within the zone qualified for the credit. 

Baltimore, a well known Enterprise Zone, also qualified for Empowerment Zone status. Unfortunately, several studies have shown that the results of the program were ineffective. Baltimore has a history of being a highly distressed city. It was not alone in its inability to experience growth. The EZ and EC Act of 1993 had little effect on the overall economies of the cities it was trying to help. The program instituted by Bill Clinton to help economically depressed areas did little more than bolster funding reserves for existing social programs.

Should EZs and ECs Continue?

With the current stormy economic climate, many more cities will experience highly distressing conditions. Unemployment for roughly half of the U.S. is at or above 11% as of the summer of 2020. Large national stimulus packages have been rolled out. The global economy is projected to experience an unprecedented blanket recession. Does targeted funding work? 

The previous studies conducted by government and independent agencies weren’t promising. This model for economic reform won’t meet the demands of a post-pandemic nation. The evidence for the efficacy of the EZ and EC Act of 1993 was inconclusive.

Does Your Business Qualify for EZ or EC Credit?

The original legislation of 1993 was extended by additional legislation into subsequent years. It is important for businesses to do their due diligence when it comes to tax filings. Many eligible business owners did not claim the tax credits associated with Empowerment and Enterprise community designations simply because they didn’t know about them. 

The original EZ and EC Act of 1993 was extended multiple times. The most recent extension allows employers to claim WOTC for employees that were hired within the zone prior to tax year 2020 and also live in the qualifying area. Wage credits can be claimed retroactively dating back two years.

Capital gains tax exclusion on business sales within the zones as well as other tax incentives and bond privileges were part of the Empowerment Zones and Enterprise Communities Act of 1993 and its subsequent extensions.  Many local businesses were unaware of these tax privileges and did not take advantage of them.  Contact us for help in filing for the tax credits you and your business are eligible for.

healthcare tax credits

Tax Credits and Deductions for Healthcare Companies

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Governments use tax deductions and credits to reward businesses for providing employment opportunities, developing and enhancing solutions, improving the economy, and making the world a better place through activities like combating climate change. 

Tax credits and tax deductions are excellent opportunities for businesses to lower their tax liability significantly. As a company in the healthcare sector, you have a higher chance of qualifying for these tax savings. 

Here are some tax credits and deductions that healthcare companies are eligible for:

1. Research and Development Tax Credit

This type of tax credit, also known as R&D, was introduced by the United States government to encourage companies within the private sector to undertake innovation. For example, pharmaceutical firms enjoy this tax credit as an incentive to improve research for vaccines. 

Through the R&D tax credit, healthcare companies retain higher profits on their products resulting from research. This is possible given that the firms pay fewer taxes and thus spend less on research. 

The R & D tax credit is not limited to a particular industry. For a company to qualify for this credit, it needs to be involved in creating new products or systems, developing or enhancing software, or improving already existing products or systems. Thus, firms in agriculture, manufacturing, engineering, energy, textile, and healthcare, among many others, can benefit from it.  

Examples of areas where healthcare companies can qualify for the R&D tax credit include the development or enhancement of performance-related surveys for professionals in the mental health sector. Creating unique seating arrangements like an armchair that also serves as a wheelchair for those in care homes also calls for research and development. Introducing processes that help to remove contaminants from chemical compounds promotes respiratory health. Also, building prototypes for orthopedic instruments fall under research and development due to the complex medical components involved. 

State and federal credit rates can vary. For example, the federal R&D rates are 20%, while the California rate is 15%

2. Small Business Healthcare Tax Credit

Both established and small businesses can benefit from tax credits. The Affordable Care Act in the United States brought forth the small business tax credit. Firms that offer their workers health insurance are eligible for this tax credit. 

To qualify for the tax credit, your company needs to have a maximum of 25 full-time employees, pay each employee $55,000 a year or below, cater for half or more of their health insurance premiums and have insurance from the Small Business Health Options Program (SHOP) market. 

The Small Business Healthcare Tax credit can cover up to 50% of the health insurance premium payments for your employees. 

You should know that you cannot claim the credit two years in a row. 

3. Pass-Through Deductions

If you are a sole proprietor, are in a partnership, S corporation, limited liability partnership, or any form of business that subjects you to a pass-through, you can get a deduction. A pass-through deduction can lower the taxes on your net income by 20%. 

Companies that fall under the category of prohibited specified trade do not qualify for pass-through deductions unless they fulfill certain conditions. Examples of this include clinical entities that are operated by the owner.

4. Business Expense Deductions

Some expenses you incur in running a business can make you eligible for tax deductions. If you are starting your business, you can apply for a deduction on your capital expenses. After that, you are eligible for deductions on your business expenses. If you travel a lot for business, you can have deductions for travel costs. 

Knowing which tax credits and deductions you are eligible for, when they’re due and how to apply for them can be confusing. That is why it’s vital to enlist the services of tax credit experts like Incentax who will simplify the process for you and help you take optimum advantage of the available federal and state tax credits. 

What is Cost Segregation in Real Estate?

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For those working in the investment real estate business, a well-implemented cost segregation study will quickly be shown to accelerate depreciation and benefit your financial situation. By undergoing a study, real estate owners will take advantage of accelerated depreciation deductions and shelter taxable income. Doing so will immediately reduce the amount of income tax that the company or individual will have to pay that year, improving cashflow. For investors with estimated quarterly payments, these studies can also help defer the payment of their income taxes. 

HOW DOES A COST SEGREGATION STUDY WORK?

A cost segregation study is a rigorous process where a cost segregation engineer analyzes real estate assets and identifies property with shorter depreciation life (personal property) from the real property , which is what creates accelerated depreciation benefits. 

The goal of each cost segregation analysis is to separate holdings into distinct categories, or asset classes, that have different depreciable recovery periods. The four main categories and their typical depreciation lives are as follows:

  • Tangible personal property, which are non-structural components of a building (furniture, fixtures, carpeting, window treatments, and specialized plumbing and electrical components, for example) typically has a five to seven year depreciable lifespan.
  • Land improvements are components found outside a building’s footprint (sidewalks, paving or landscaping) depreciate typically over fifteen years.
  • Buildings depreciate over 27.5 or 39 years depending whether the type of property is residential rental or commercial.
  • The land itself, which is not depreciable.

THE IMPORTANCE OF A GOOD CONSULTANT

Cost segregation studies involve a lot of detailed knowledge of the regulations surrounding all tax incentive rules, so finding the right provider to guide you through each step is very important. The cost segregation consultant will find every component of your property that can be legally considered to be shorter life property and reclassify those assets to generate more depreciation deductions for income tax purposes. 

Once the study is finalized, the client will be provided with the information they need to calculate the accelerated depreciation deductions for income tax purposes.  The cost segregation report will also act as supporting documentation in the possibility of any IRS audit.  

In general terms, any piece of commercial real estate that was acquired, built, or put into service after 1986, including acquisitions, construction, building, or improvements- will be eligible for cost segregation.  

At Incentax, we help companies gain access to money-saving tax incentive programs at both the federal and state level. Our team is entirely made up of tax incentive experts and engineers, that guarantee a high level of quality in our work by offering audit support for free. For more information about our services or processes, contact us today!