Both the federal government and Massachusetts offer special tax deductions and credits for owners of commercial real estate. Most of the incentives provide tax breaks for making energy-efficient improvements or investments in economically depressed or abandoned areas. These deductions and credits can provide substantial tax savings and create new opportunities for commercial property owners and developers looking to expand their portfolios.
Federal Incentives
The following are federal incentives that offer tax breaks:
• The energy-efficient commercial buildings deduction. The Energy Policy Act of 2005 created Internal Revenue Code Section 179D, which allows immediate expensing (rather than depreciation) of energy-saving improvements made to commercial buildings. The deduction is equal to $1.80 per square foot of property over which the expenditures were made. The property’s cost basis must be reduced by the amount of the deduction.
The general requirements that must be met to take the deduction are as follows:
1. The building must be located in the United States;
2. The improvements must be installed as part of the interior lighting system, the heating, cooling, ventilation and hot water systems or the building envelope;
3. The improvements must be installed and certified in accordance with a plan to reduce the building’s total energy and power by 50 percent; and
4. The improvements must be placed in service between Jan. 1, 2006, and Dec. 31, 2008.
If the 50 percent energy-reduction standard is not met, taxpayers may still receive a partial deduction of up to 60 cents per square foot of property for each separate system that meets the 50 percent requirement on its own.
• The rehabilitation credit. A credit is allowed for expenditures made to qualified rehabilitated buildings. A qualified rehabilitated building is one that was placed in service prior to 1936 or is a certified historic structure that is listed on the National Register of Historic Places or is located in a registered historic district. The expenditures must be made in connection with the renovation, restoration or reconstruction of the building. Money spent on new construction or enlargements to existing buildings do not qualify for the credit. The allowable credit is 10 percent of the qualifying expenditures for buildings placed in service before 1936 and 20 percent for certified historic structures. For qualifying expenditures made in the Gulf Opportunity zone between Aug. 27, 2005, and Jan. 1, 2009, the 10 percent credit is increased to 13 percent and the 20 percent credit is increased to 26 percent.
• The new markets credit. The new markets credit was enacted to encourage private equity investments in economically distressed areas. The tax credit is allowed for qualified equity investments made in qualified community development entities. A qualified CDE (as certified by the Department of the Treasury) is a domestic corporation or partnership whose primary mission is to serve or provide investment capital for low-income communities. The credit is allowed over seven years and is computed by multiplying the credit percentage by the taxpayer’s investment in the CDE. The credit percentages are 5 percent for the first three years and 6 percent over the last four years for a total credit of 39 percent over the seven-year period.
• The disabled access credit. Owners of commercial properties can receive a tax credit for making their buildings handicap-accessible in compliance with the Americans with Disabilities Act of 1990. This credit may only be claimed by businesses whose gross receipts for the prior year did not exceed $1 million or who employed less than 30 full-time employees during the preceding year. The credit is equal to 50 percent of eligible expenditures between $250 and $10,250. The maximum allowable credit is $5,000.
Massachusetts Incentives
The following are state incentives that offer tax breaks:
• Abandoned building renovation deduction. Massachusetts allows a deduction equal to 10 percent of the costs incurred in renovating qualifying abandoned buildings for commercial use. The building must be located in an economic opportunity area and must be designated as abandoned by the Economic Assistance Coordinating Council. An abandoned building is one that has been 75 percent vacant for the two years preceding the renovations.
• Economic area opportunity credit. Businesses that purchase property for use in an economic opportunity area may take a 5 percent credit of the cost of the qualifying property. The property must be used exclusively in an EACC-certified project located in an EOA. A business must submit an application to the Massachusetts Department of Revenue to receive eligibility for the credit. Businesses eligible for the credit must file applications with the DOR for each project and each year the credit is claimed. The 5 percent credit may not offset more than 50 percent of any tax liability due. Any unused credit may be carried forward for 10 years.
• Historic rehabilitation credit. The HRC allows a tax credit for up to 20 percent of qualified rehabilitation expenditures on historic rehabilitation projects. The credit is available for projects that achieve final certification from the Massachusetts Historical Commission. Effective June 24, 2006, for the period beginning on Jan. 1, 2006, and ending on Dec. 31, 2011, the state will make available up to $50 million a year in historic rehabilitation credits, of which 25 percent will be awarded to projects that contain affordable housing. Unlike the Economic Area Opportunity Credit, the HRC may offset up to 100 percent of a taxpayer’s total tax liability. Any unused portions of the credit may be carried forward five years.
• Brownfields Credit. Created as part of the Brownfields Act in 1998, the Brownfields Credit allows corporate, non-corporate and nonprofit taxpayers a credit for costs incurred to rehabilitate contaminated property owned or leased for business purposes and located within an economically distressed area. The credit is available for projects that begin before Aug. 5, 2011, and for costs that are incurred before Jan. 1, 2012. Eligible properties are ones that: Are owned or leased by the taxpayer; have been reported to the Massachusetts Department of Environmental Protection; and are located in an economically distressed area as designated by the DEP. The credit is equal to either 25 percent or 50 percent of qualified response and removal costs depending upon the extent of the cleanup. The maximum amount of the credit may not exceed 50 percent of the tax liability for the year and for corporate taxpayers, the credit may not reduce the corporate excise tax below the $456 minimum. Unused credits may be carried forward for five years but may not be used in a year that the taxpayer has ceased to maintain the remedy operation status or the permanent solution for which the credit was granted. The credit may be transferred, sold or assigned.
• Solar and wind power deduction. Massachusetts corporations may deduct expenses incurred with the installation of any solar or wind powered climate control or water heating system. The corporation may deduct the eligible expenses from its taxable income and the qualifying system will not be subject to the tangible property portion of the corporate excise tax. If the eligible systems do not continue in qualified use for 10 years, the previously allowed deductions must be added back to taxable income.
Massachusetts also allows a tax credit to corporations that installed solar water-heating systems in commercial buildings between Nov. 1, 2005, and March 31, 2006. The credit is available for the 2006 and 2007 tax years and it is repealed as of Jan. 1, 2008. A corporation may not take both the credit and deduction. But for businesses that missed the window for installing systems eligible for the credit, they are still eligible for the deduction.
Tax breaks can provide significant tax savings and goodwill while aiding economically troubled areas. For commercial real estate property owners and developers looking to expand and maximize tax savings, these deductions and credits should be considered.
