Adapting to recent changes in tax law can help suffering companies survive the recession, said Phil Jelsma of Luce Forward Hamilton & Scripps during an Urban Land Institute lunch program Tuesday.
Small builders, developers and real estate investors will be affected most by the changes brought about by the American Recovery and Reinvestment Act of 2009 (ARRA) and other legislation.
Recent changes seen as favorable to business include deferring cancellation of indebtedness income, homebuyer tax credits, tax credits for installation of solar technology, and incentives for retrofit projects that increase energy efficiency. The measures serve as “life support” for struggling small businesses, Jelsma said.
Perhaps the most beneficial provision afforded under ARRA is a five-year carry back of losses in 2008 and 2009. Under the legislation, a taxpayer may carry back losses for between three and five years. Five-year carry backs are typically only granted to taxpayers with less than $15 million in gross receipts, including any entity in which the taxpayer has a 50 percent or greater common interest.
“One reason small homebuilders are still alive today is because they’re getting refunds back from losses,” Jelsma said.
Discharge of indebtedness during 2009 can also be included in income over a five-year period. The provision allows companies to allocate the deferred amount partner by partner and debt by debt.
For example, if a contractor satisfies a $10 million debt with a new debt instrument of $5 million, the resulting $5 million cancellation indebtedness income can be spread in increments of $1 million between 2014 and 2018, Jelsma said.
Homebuilders also stand to benefit from homebuyer tax credits available at both the state and federal levels. ARRA increased the federal tax credit available to first-time homebuyers by $500 to $8,000. A separate tax credit in the state of California provides a 5 percent tax credit, capped at $10,000 for purchase of a new home. The credit is spread over three consecutive tax periods. First-time homebuyers purchasing a new home can combine the tax credits, creating an $18,000 tax benefit.
Lobbyists are pushing in Sacramento and Washington, D.C., to extend both homebuyer tax credits, however it is unclear whether an extension will be granted, Jelsma said.
Builders may also benefit from the Energy Policy Act of 2005, which was recently extended to 2009. The legislation established tax credits of up to $2,000 for builders of homes 50 percent more energy efficient than a comparable dwelling unit. A $1,000 credit is also available if heating and cooling consumption is reduced by 30 percent.
Remodeling contractors can help building owners apply for a 30 percent tax credit available for energy efficiency improvements such as weather stripping, fans, furnaces, windows skylights and water heaters. The credit is capped at $1,500.
The energy efficiency tax credits are not limited to residential properties. A commercial building tax deduction of $1.80 per square foot is available for owners of new or existing buildings who make improvements that reduce energy consumption by at least 50 percent. If the building cannot meet the 50 percent requirement, owners may receive a 60-cents-per-square-foot tax credit for improvements certified to contribute to a 50 percent reduction in energy consumption, Jelsma said.
On the topic of energy efficient upgrades, Jelsma noted that ARRA also makes $2.3 billion in tax credits available to people investing in renewable energy technologies, such as solar.
Jelsma spoke to a crowd of approximately 50 attendees of ULI’s lunch program titled, “Understanding Recent Tax Law Changes Can Save Money for You and Your Clients.” The event was held at the offices of San Diego-based Luce Forward, which specializes in real estate law.