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Tax Deductions and Credits for Owners of Commercial Real Estate in Massachusetts
by Mark Minassian, CPA

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 can create new opportunities for commercial property owners and developers looking to expand their portfolios.

Federal Incentives
  1. The Energy Efficient Commercial Buildings Deduction. The Energy Policy Act of 2005 (EPACT) 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:

    • The building must be located in the United States
    • The improvements must be installed as part of 1) the interior lighting system, 2) the heating, cooling, ventilation and hot water systems or 3) the building envelope
    • The improvements must be installed and certified in accordance with a plan to reduce the building’s total energy and power by 50%
    • The improvements must be placed in service between January 1, 2006 and December 31, 2008

    If the 50% energy reduction standard is not met, taxpayers may still receive a partial deduction up to $0.60 per square foot of property for each separate system that meets the 50% requirement on its own.

  2. 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% of the qualifying expenditures for buildings placed in service before 1936 and 20% for certified historic structures. For qualifying expenditures made in the Gulf Opportunity (GO) zone between August 27, 2005 and January 1, 2009, the 10% credit is increased to 13% and the 20% credit is increased to 26%.

  3. 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 (CDEs). 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% for the first three years and 6% over the last four years for a total credit of 39% over the seven year period.

  4. The Disabled Access Credit. Owners of commercial properties can receive a tax credit for making their buildings handicap accessible in compliance with the American 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% of eligible expenditures between $250 and $10,250. The maximum allowable credit is $5,000.

Massachusetts Incentives

  1. Abandoned Building Renovation Deduction. Massachusetts allows a deduction equal to 10% of the costs incurred in renovating qualifying abandoned buildings for commercial use. The building must be located in an Economic Opportunity Area (EOA) and must be designated as abandoned by the Economic Assistance Coordinating Council (EACC). An abandoned building is one that has been 75% vacant for the two years preceding the renovations.

  2. Economic Area Opportunity Credit. For businesses that purchase property for use in an EOA, they may take a 5% 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 (DOR) 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% credit may not offset more than 50% of any tax liability due. Any unused credit may be carried forward for ten years.

  3. Historic Rehabilitation Credit. The Historic Rehabilitation Credit (HRC) allows a tax credit for up to 20% of qualified rehabilitation expenditures on historic rehabilitation projects. The credit is available for projects that achieve final certification from the Massachusetts Historical Commission (MHC). Effective June 24, 2006, for the period beginning on January 1, 2006 and ending on December 31, 2011, the state will make available up to $50 million a year in historic rehabilitation credits of which 25% will be awarded to projects that contain affordable housing. Unlike the Economic Area Opportunity Credit, the HRC may offset up to 100% of a taxpayer’s total tax liability. Any unused portions of the credit may be carried forward five years

  4. Brownfields Credit. Created as part of the Brownfields Act in 1998, the Brownfields Credit (BC) allows corporate, non-corporate and non-profit 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 August 5, 2011 and for costs that are incurred before January 1, 2012. Eligible properties are ones that are: 1) either owned or leased by the taxpayer; 2) have been reported to the MA Department of Environmental Protection (DEP); and 3) are located in an economically distressed area as designated by the DEP. The credit is equal to either 25% or 50% of qualified response and removal costs depending upon the extent of the cleanup. The maximum amount of the credit may not exceed 50% 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.

  5. 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 their 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 ten years, the previously allowed deductions must be added back to taxable income.

    Massachusetts previously allowed a tax credit to corporations that installed solar water- heating systems in commercial buildings between November 1, 2005 and March 31, 2006. The credit was available for the 2006 and 2007 tax years, but was repealed as of January 1, 2008.

These 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.

Disclaimer:  Any tax advice contained in this article is not intended or written to be used, and cannot be used, to avoid penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

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