2023 Marcum Year-End Tax Guide

THE MARCUM YEAR-END TAX GUIDE 2023 99

Real estate owners and operators are experiencing increased headwinds across all real estate asset classes as they face changes to various tax rules, adjust to the post-COVID real estate market, and deal with the current interest rate environment. In these dynamic times, it remains important to stay current on the latest developments in the industry to make the best decisions as an owner or operator in the field. TAX PLANNING CONSIDERATIONS FOR COMPETITIVE CONSTRUCTION COMPANIES BY BRIAN MARRON

PROPER TAX TREATMENT OF CERTAIN CONTRACTS Most construction contractors must file under IRC 460, which addresses long-term contracts and primarily reports on the Percent of Completion (POC) accounting method. However, several types of contracts should be looked at individually to determine if other beneficial reporting methods exist for tax purposes, and IRC 460 has multiple exceptions. It is imperative to address this sooner rather than later as many exceptions require filing a request for accounting method change with the IRS, which needs to be completed by December 31. Each contract a contractor has could provide a different exception, so you must address each contract, or you could miss out on opportunities to defer revenue to future years. What are some of those exceptions? • Home construction contracts (four or fewer dwelling units) • Residential construction contracts (more than four dwelling units)

• Unit-price contracts • Guaranteed maximum price (GMP) contracts • Contracts with a “pay when paid” clause • Maintenance contracts Upon reviewing your contracts, if any of these apply, an assessment should be done to determine the applicability of IRC 460, calculate the tax benefits, and, ultimately, file the appropriate change of accounting method with the IRS. In one recent case, Marcum worked with a larger contractor filing their taxes on a percent complete basis. Upon reviewing their contracts, we were able to file a method change with the IRS and defer $13 million of income, which equated to reducing current federal income tax by $4.5 million. To take that one step further, in this rising interest rate environment, the contractor has more liquid cash available and has estimated the interest saved for one year alone on this money is another $250,000. This is one example, but it shows the importance of reviewing contracts to determine tax applicability.

179D 179D is a deduction for energy efficient construction or building improvements to commercial buildings. What used to be a maximum deduction of $1.8 per square foot can now be a maximum of $5 per square foot as of January 1, 2023, if prevailing wage and apprenticeship requirements are met. This is a significant opportunity for many contractors. For example, a 100,000-square-foot project may yield a contractor an additional $500,000 deduction. Understanding this and knowing how to obtain this credit is critical. For contractors that can address energy efficiency on their projects, 179D likely represents a significant advantage. TAX CREDITS • R&D Tax Credit

Construction companies may be eligible for research and development-related credits if they perform design-build contracts or continuously experiment to improve processes and techniques.