Tax changes from Congress at the end of 2020 and 2021 continue to bring significant opportunities for commercial real estate developers, managers, and operators. From the advantageous changes made to the Employee Retention Tax Credit to extensions of other tax credits, the following five tax moves will help to minimize 2021 tax liabilities.
EMPLOYEE RETENTION TAX CREDIT
Last year’s Coronavirus Aid, Relief, and Economic Security (CARES) Act created a payroll tax credit to offset the cost of retaining employees – the Employee Retention Tax Credit (ERTC). For 2020, employers can claim the credit on a quarterly basis if they experienced a 50% decline in 2020 gross receipts compared to the same quarter in 2019. The credit is equal to 50% of qualified wages and health plan expenses after March 12, 2020 and before Jan. 1, 2021.
The Consolidated Appropriations Act, 2021 (CAA) and the American Rescue Plan (ARP) Act modified and extended the ERTC. With these modifications, the size of the credit is increased to 70% of eligible wages and health expenses incurred between Jan. 1, 2021, and Dec. 31, 2021, with a $10,000 per-employee per-quarter maximum (totaling $28,000 per employee in 2021).
The CAA also created retroactive ERTC benefits that may be treated as incurred during the fourth quarter of 2020. Retroactive benefits are based on eligible wages paid after Dec. 31, 2019 and before Oct. 1, 2020. These cash refunds may be accessed by amending any previously filed payroll tax returns for any quarter that experienced the revenue decline compared to the same quarter in 2019. Although many commercial real estate operators did not take out Paycheck Protection Program (PPP) loans, the CAA and ARP Act permit PPP loan recipients to claim the ERTC regardless of PPP loan involvement.
ENERGY-EFFICIENT COMMERCIAL BUILDINGS DEDUCTION (SECTION 179D)
The extension of the deduction for energy-efficient building investments also benefits commercial real estate. The CAA made Section 179D permanent, ensuring the continuation of deductions for energy efficiency improvements to buildings, including lighting, heating, cooling, ventilation and hot water systems. The provision also indexes for inflation the amount of the $1.80-per-square-foot limitation.
WORK OPPORTUNITY TAX CREDIT
Also available for 2021 is the Work Opportunity Tax Credit (WOTC) program. This credit is for employers hiring individuals who are members of one or more of 10 targeted groups, including young individuals and veterans. The CARES Act set forth that employers cannot claim both WOTC and ERTC credits for the same employee, and the CAA upheld this stipulation through 2021.
Commercial real estate should also take note of extensions and phase-outs of energy credits. The CAA extends the current 26% investment tax credit for any solar energy property, fiber-optic solar equipment, fuel cell property and small wind energy property that begins construction by the end of 2022. The CAA also extends the 22% rate for a property that begins construction by the end of 2023, after which the credit is reduced to 10% or 0%.
EMPLOYEE BENEFITS-RELATED CREDITS
The refundable payroll tax credit for paid sick and family leave established as a part of the Families First Coronavirus Response Act (FFCRA) was extended through the end of September by the ARP Act. Only some commercial real estate owners will qualify, as the program is for private-sector employers with fewer than 500 employees (and government entities).
Also extended was the employer tax credit for paid family and medical leave through 2025. Eligible employers can claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave. Taxpayers who claim the FFCRA credit cannot use those wages for purposes of calculating this employer tax credit. The maximum amount of family and medical leave that may be taken into account is 12 weeks per taxable year per eligible employee.
HOW TO MAXIMIZE PLANNING OPPORTUNITIES
Working with a tax provider can help you maximize the planning opportunities for 2021.
Paul Rosenkranz is the lead tax managing director in the Los Angeles office of CBIZ & MHM. He has more than 35 years of experience providing tax consulting and planning services for real estate developers, operators, managers, and closely held businesses.