Before You File for 2017: Important Tax Breaks Extended by Congress

Over 30 tax breaks (the “tax extenders”) were extended when President Trump signed into law the Bipartisan Budget Act of 2018 (the “Act”) on February 9, 2018. In addition to keeping the government funded through March 23 and providing tax relief to certain victims of natural disasters, the Act retroactively extended most of these tax extenders through December 31, 2017, which means they may be claimed on 2017 federal income tax returns.

More good news! The Internal Revenue Service (“IRS”) recently announced that it has reprogrammed its processing systems and is ready to process 2017 returns claiming the tax extenders. Also, the House Ways and Means Committee is meeting this week to discuss permanently enacting some of these extenders in order to avoid another last-minute fire drill like the ones that happen every year on this issue.

Which tax breaks were extended, and what do you need to do to claim them?

Renewable Electricity Production Tax Credit (“PTC”)

A PTC is a credit allowed over time based on the amount of energy produced from qualified energy resources at qualified facilities. Qualified facilities are generally facilities that generate electricity using a qualified energy resource. Qualified energy resources are:

  • Wind
  • Closed-loop biomass
  • Open-loop biomass
  • Geothermal energy
  • Solar energy
  • Small irrigation power
  • Municipal solid waste
  • Qualified hydropower production
  • Marine and hydrokinetic renewable energy

Under pre-Act law, qualifying facilities that generate electricity using closed-loop biomass, open-loop biomass, geothermal energy, land fill gas and trash (both of which use municipal solid waste), qualified hydropower, and marine and hydrokinetic renewable energy must have begun construction before January 1, 2017, to claim a PTC. The Act extended the date by which construction of these qualifying facilities must begin by one year to January 1, 2018. Although the deadline for beginning construction on a facility has passed, it’s still worth it to take stock of all facilities that may qualify for the PTC based on whether construction began in 2017.

Investment Tax Credit (“ITC”)

An ITC is an upfront credit against the capital expended to build a facility. The Act extended ITCs for certain types of facilities. Specifically, qualified microturbine, combined heat and power, and geothermal heat pump facilities are entitled to a 10 percent ITC if construction begins before January 1, 2022. (Note: Unlike previously proposed extender legislation, the Act did not include any extensions for geothermal energy facilities, although those facilities did receive an extension for the PTC.)

Additionally, qualified fuel cell, fiber-optic solar, and small wind facilities are entitled to an ITC as follows:

  • 30 percent if construction begins before January 1, 2020
  • 26 percent if construction begins after December 31, 2019, and before January 1, 2021
  • 22 percent if construction begins after December 31, 2020, and before January 1, 2022

In all cases, the project must be placed in service by December 31, 2023. These extended deadlines make it crucial to reevaluate any proposed projects in order to begin construction before the deadlines so as to maximize the amount of ITCs allowed.

Energy Efficient Commercial Building Deduction

Building owners and tenants may claim a deduction for the cost of energy efficient commercial building property placed into service during the taxable year. Commercial property includes retail buildings, offices, industrial buildings, certain apartments and warehouses. Architects, engineers, contractors, environmental consultants and energy service providers may also qualify for the deduction if they work on government-owned property.

The deduction can be up to $1.80 per square foot of a building that has undergone energy-efficient improvements (specifically to interior lighting, building envelopes and HVAC systems) that reduce the building’s total energy and power costs by certain amounts. This deduction previously did not apply to any property placed into service after December 31, 2016, but the Act extended the deduction for one year to property placed in service before January 1, 2018. As a result, in order to take advantage of this deduction, all energy-efficient improvements made during 2017 must be captured and calculated.

New Energy Efficient Home Credit

Eligible contractors may claim a tax credit of $1,000 or $2,000 for the construction or manufacture of a new energy-efficient home that meets certain energy-saving criteria and that was acquired by a person for use as a residence. A person can be an individual, trust, estate, partnership, association, company or a corporation. The home doesn’t have to be a person’s primary residence in order to qualify for this credit.

Under the pre-Act law, this credit didn’t apply to homes that were acquired after December 31, 2016. The Act extended the credit for one year to homes acquired before January 1, 2018. Because a qualifying home can be a single unit within a larger building, such as an apartment or condominium, an eligible contractor who constructs or manufactures a multi-family dwelling may be able to claim a credit in the hundreds of thousands of even millions of dollars. Additionally, because the credit is allowed for the taxable year in which the home was acquired (rather than the taxable year in which the home was constructed or manufactured, if different), contractors want to make sure they take advantage of the credit for any homes they constructed or manufactured that were then acquired in 2017.

Residential Energy-Efficient Property Credit

An individual is allowed a nonrefundable personal tax credit for the purchase of residential energy-efficient property such as qualified solar electric property, qualified solar water heating property, qualified fuel cell property, qualified small wind energy property and qualified geothermal heat pump property. Before the Act, the credit for qualified fuel cell property, qualified small wind energy property, and qualified geothermal heat pump property only applied to property placed in service before December 31, 2016. The Act extended the credit for the purchase of all enumerated types of residential energy-efficient property placed into service before December 31, 2021, at the following percentages:

  • 30 percent for property placed into service after December 31, 2016, and before January 1, 2020
  • 26 percent for property placed into service after December 31, 2019, and before January 1, 2021
  • 22 percent for property placed into service after December 31, 2020, and before January 1, 2022

As a result, taxpayers now have additional time to claim the residential energy-efficient property credit for certain qualified property.

Other Energy Credit Extender Provisions

The following energy credits have also been extended:

  • Nonbusiness energy property credit
  • Credit for fuel cell vehicles
  • Alternative fuel vehicle refueling property credit
  • Credit for two-wheeled plug-in electric vehicles
  • Second generation biofuel producer credit
  • Biodiesel and renewable diesel tax credits
  • Alternative fuels and mixtures excise tax credit

Empowerment Zone Tax Incentives

Certain economically depressed areas have been designated as empowerment zones. Certain businesses and individual residents within these designated zones could be eligible for special tax incentives, such as a 20 percent wage credit, liberalized section 179 expensing rules, tax-exempt bond financing, and deferral of capital gains tax on the sale of qualified assets. Under the old tax rules, the empowerment zone designations expired on December 31, 2016. The Act retroactively extends the period for which the designation of an empowerment zone is in effect through December 31, 2017. As a result, taxpayers in empowerment zones have an additional year to take advantage of these incentives.

Other Extenders

Other credits and provisions that were extended include, but are not limited to:

  • Exclusion from gross income of discharged home mortgage debt
  • Deduction for mortgage insurance premiums as qualified residence interest
  • Above-the-line deduction for qualified tuition and related expenses
  • Credit for railroad track maintenance

Next Action Steps

Do any of these tax incentives sound like they potentially match your current situation? Are you curious about what other tax extenders might be out there to claim?

Reach out and start the conversation with an advisor on the Credits and Accounting Methods team of Cherry Bekaert. Whether you have one simple question or you think you might need an analysis of your tangible property, repairs and maintenance, and other areas that might be eligible for some lucrative tax breaks, the specialists on this team are here to help you get answers.