If you’re a business owner or CFO, the idea of leaving money on the table is cringe-worthy. Tax credits and incentives offer the opportunity to lower your construction company’s tax burden, dropping more money to your bottom line.
If your construction business isn’t taking advantage of every available tax savings opportunity, you’re missing out. Many construction contractors, however, aren’t aware of some Maryland and federal credits that could generate substantial tax savings for them.
Credits vs. Deductions
Let’s make one distinction before looking at some of the most attractive tax credits.
Tax credits are not deductions. They’re dollar-for-dollar reductions on taxes owed.
1. Research & Development (R&D) Tax Credit
One federal tax credit that is commonly missed by contractors is the IRC Section 41 Research and Experimentation Tax Credit, better known as the R&D Tax Credit.
Most contractors miss the R&D Tax Credit either because they don’t know about it, or because they believe it doesn’t apply to them.
The R&D Tax Credit encompasses more than just research. It also includes the development of new processes, techniques, formulas and design of new projects. A contractor who begins to use a new process to improve the way they do things may qualify for the tax credit. The R&D Tax Credit is a dollar-for-dollar reduction in tax liability that can be carried forward up to 20 years.
For contractors qualifying for the R&D Tax Credit, there is also a credit against regular Maryland tax for businesses that incur qualified research expenses within the state.
The total amount of credits depends on the amount of eligible expenses incurred, with a limit of $12 million for all Maryland businesses that apply. To claim the credit, a contractor must submit an application to the Department of Business and Economic Development by September 15 of the year following the taxable year in which the expenses were incurred. If the Maryland R&D Tax Credit exceeds the tax imposed for that year, the credit may be carried forward up to seven years.
2. Enterprise Zone Tax Credits
Maryland contractors located in economically distressed communities throughout the state are eligible for local property tax credits and state income tax credits under the Maryland Enterprise Zone Program.
To qualify, contractors need to determine if they are located in one of the 36 eligible enterprise zones or two focus areas. Contractors located in enterprise zones can claim a 10-year credit against local real property taxes on a portion of real property improvements. The credit is 80 percent of the assessment increase during the first five years. The credit decreases 10 percent annually thereafter to 30 percent in the tenth year.
Along with the real property tax credit, Maryland contractors located in an enterprise zone may claim a one-year or three-year credit for wages paid to new employees in new positions. The general income tax credit is a one-time $1,000 credit for each qualified new worker filling a position in an enterprise zone; the credit increases to $1,500 if your business is in an enterprise focus area. For economically disadvantaged employees, the credit increases to a total of $6,000 per worker over a period of three years, while the credit is $9,000 per worker over a three-year period in an enterprise zone focus area.
3. Energy & Environmental Tax Credits
There are four energy and environmental credits available in Maryland:
The Clean Energy Production Credit is equal to $0.85 for each kilowatt hour of electricity that your business produces from a qualified energy source. The credit may not exceed $500,000 annually or $2.5 million over a five-year period.
The Green Building Tax Credit is available for specified costs for construction or rehabilitation of green buildings and certain equipment that meets energy efficiency and environmental standards.
The Maryland Mined Coal Credit is $3 for each ton of Maryland mined coal that the co-generator purchases in the taxable year in excess of the number of tons of Maryland mined coal that the co-generator purchased in the calendar year 1986.
The Solar Energy Grant Program offers a credit to businesses for acquiring and installing photovoltaic property and solar water heating property.
4. Heritage Structure Rehabilitation Program
Formerly called the Competitive Commercial Tax Credit, the Heritage Structure Rehabilitation Program allows owners of income-producing properties in Maryland to earn a state income tax credit for renovating historic buildings. The program offers a tax credit up to 20 percent of eligible expenses, up to a total of $3 million.
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