Commonly Overlooked Tax Credits for Contractors

As you prepare for year-end, there are some valuable tax credits that you may want to consider. If your business qualifies, these often-overlooked tax credits could provide significant savings come tax time.

Work Opportunity Tax Credit

Contractors seeking additional tax savings in 2024 should consider taking advantage of the Federal Work Opportunity Tax Credit (WOTC) program. The WOTC, which has been extended multiple times and is set to expire at the end of 2025, is a non-refundable tax credit that rewards employers who hire individuals from specific disadvantaged groups. Some of the targeted groups include veterans, families receiving certain government benefits and individuals who receive long-term family assistance.

The WOTC allows employers to claim 25% to 40% of a qualified employee’s first-year wages, ranging from $6,000 to $24,000, depending on the individual’s hours worked* and their targeted group. For long-term family assistance recipients, the credit is 40% of the first $10,000 in qualified first-year wages and 50% of the first $10,000 for the second year.

An added benefit of the WOTC is that it currently has no limitations on the number of qualifying individuals an employer can hire from these targeted groups during the year to claim the credit. To claim the credit, an employer must file IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with the Department of Labor, and it MUST be within 28 days of the date of hire.

It is important to note that, generally, the wages used to calculate the WOTC cannot be used to calculate other wage-based credits. However, an eligible employer may be able to claim more than one wage-based credit for the same employee, provided that any wages used to calculate the WOTC are not also utilized to calculate another wage-based credit.

* The credit equals 25% of employee wages for employees who work at least 120 hours during the year and 40% if the employee works over 400 hours.

 New Energy Efficient Home Credit  

The New Energy Efficient Home Credit, also referred to as the Internal Revenue Code (IRC) §45L Credit, is another important tax incentive to consider as the year is winding down. This credit allows eligible contractors to claim a tax credit of up to $5,000 per qualifying new energy-efficient home sold or leased after 2023 and before 2033.

To qualify for the general business tax credit, contractors must construct or substantially reconstruct a qualified new energy-efficient home in the United States. The home must be purchased or leased as a primary residence from the eligible contractor during the tax year. An eligible contractor is defined as the person and/or company that constructs the qualified new energy-efficient home, and the contractor must have a basis in the property during its construction to qualify.

To qualify as a new energy-efficient home, they must be located in the United States, construction must be substantially or entirely completed after August 8, 2005, and they must meet certain energy-saving requirements as defined in IRC §45L(c). The energy-saving requirements outlined vary based on the classification of each home and the date of acquisition.

For homes acquired before 2023, the credit ranges from $1,000 to $2,000, depending on the standards met. This includes meeting certain federal manufactured home rules and certifying that the home has an annual level of heating and cooling energy consumption that is at least 50% (or 30% for certain manufactured homes) less than that of a comparable home that meets certain energy standards, with building envelope component improvements accounting for at least 1/5 (or 1/3 for certain manufactured homes) of the reduction.

For homes acquired in 2023 through 2032, the credit increases to between $500 and $5,000, depending on the certification achieved and the standards met, which include the Energy Star program requirements, Zero Energy Ready Home program requirements, and for multi-family dwelling units, prevailing wage requirements must be met as well.

To claim the credit, a business must file IRS Form 8908, Energy Efficient Home Credit, with its timely filed tax returns (including extensions). An eligible contractor must obtain certification(s) that the dwelling unit meets the applicable program requirements, found on the program’s website. Additional substantiation is required for those claiming to meet the prevailing wage requirements.

If you have questions regarding the tax credits discussed or your business or personal income tax situation, we strongly encourage you to discuss these matters before year-end with your tax advisor or reach out to the tax professionals at Dannible and McKee, LLP.

Contributing author: Kaitlyn L. Mariano, CPA, is a senior tax manager at Dannible & McKee.  Kaitlyn has over 11 years of experience overseeing tax engagements for a variety of clients with a focus on construction, manufacturing, multi-state taxation and high-net-worth individuals. For more information on this topic, contact Kaitlyn at kmariano@dmcpas.com or (315) 472-9127.