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Taxes and Retirement

Homebuilders and real estate developers may benefit from new tax incentives, while the SECURE Act aims at employees’ financial future 

In his years as a public accountant, Steve Ruda knows his numbers. 

He deals with tax laws on a daily basis, has seen some changes over the years, and knows it’s a rare find when a new law makes people happy. 

But there are at least a couple of tax law changes this year that should make homebuilders and real estate developers smile. 

The provisions – 45L tax credit for construction of energy-efficient homes and 179D tax deduction for energy-efficient commercial buildings – fall under the Omnibus Appropriations Bill HR 1865, according to Ruda, director of client relations at ICS Tax LLC in Sioux Falls, S.D.

“I think it’s a good thing,” he said of provisions in the tax extenders section of the bill, which aim to promote more energy efficiency in buildings. Both expired at the end of 2017. “This bill extends them for 2020 but also makes them retroactive for 2018 and 2019, so now we can go back to those years and buildings.” 

The first provision, 45L, extends the energy efficient home credit to developers, Ruda said. It offers up to $2,000 per unit that uses energy consumption significantly less than national energy standards. 

The second provision, 179D – sister act to 45L, Ruda said – allows a tax deduction instead of a tax credit. Developers can get a deduction based on the area of a building and not its dollar amount, Ruda said. Tenants may also be eligible if they make construction expenditures, according to the U.S. Office of Energy Efficiency & Renewable Energy

The tax deduction is $1.80 per square foot for owners of new or existing buildings who install features that help reduce the building’s total energy and power cost by 50% or more than certain national energy standards. Features may include interior lighting, building envelopes, and heating, cooling, ventilation or hot-water systems.

Sixty cents per square foot is available to building owners who install lighting, building envelopes, or heating and cooling systems that meet certain target levels or through the interim lighting rule, according to the department.

Ruda said it may be worth the time and effort for homebuilders and developers to go back a couple of years to see if they qualify for the deduction.

According to the energy office, other real estate tax benefits extended through 2020 are tax exclusion for home mortgage debt forgiveness; tax deduction for mortgage insurance premiums; and a New Markets Tax Credit.

Another tax change highlighted by professionals that Prairie Business reached out to include one that looks at employees’ financial future. 

Secure the Future

Mel Schwarz is happy about his future, in part because of changes to retirement laws.

The SECURE Act – “Setting Every Community Up for Retirement Enhancement” – was signed by President Donald Trump in December as part of the government’s spending bill. Its aim is to make planning for retirement easier by allowing more employers to offer annuities as investment options within 401(k) plans.

“Mostly it’s an attempt to make it easier for people to access retirement, and to put money away for retirement savings and keeping it there,” said Schwarz, director of tax legislative affairs for Eide Bailly. The company is headquartered in Fargo, N.D.. with offices throughout the upper Midwest, but Schwarz works out of Washington, D.C.

As many know it’s a good idea to supplement Social Security with personal savings, he said, such as IRAs and 401(k) plans. But not all businesses offer retirement programs and not everyone is saving for the future. According to the Pension Rights Center, in fact, only about 55% of the adult population participate in a workplace retirement plan and, according to Investopedia, many of those who do are “woefully behind.”

Employers currently hold fiduciary responsibility to ensure what retirement plans are appropriate for employees’ portfolios, according to a report by Market Watch, “but under the new rules, the onus falls on insurance companies, which sell annuities, to offer proper investment choices.”

Schwarz said in a phone interview with Prairie Business that the SECURE Act, which is technically a revamped bill but is treated like a new one, cleared out barriers that previously made it difficult for small and medium-sized businesses to offer retirement programs. Now it allows them to access plans that are both less expensive and easier to administer.

Schwarz said he believes the act is a positive, especially for the small- to medium-sized markets.

“I don’t see this as a tax break for big business,” he said. “The big boys will do what they want anyway, so let them do it. But this will benefit the small and medium business.” 

More importantly, he said “the true beneficiary is the individual worker.” That may include the part-time worker, who now could be eligible to participate in an employer retirement plan.

Other things the act does is push back the age, from 70.5 to 72, at which retirement plan participants need to take required minimum distributions (RMDs). They also can make contributions past the age of 70.5.

Eric DeHann, a CPA with the Woltman Group in Sioux Falls, S.D., said the maximum 401(k) contribution is $19,500, but those born before 1971 can put in an additional $6,500. “The caps apply to 403(b) and 457 plans as well,” he said. “The cap on SIMPLEs is $13,500 plus $3,000 extra for people age 50 and up.”

The bill also eliminates the 10% fine formerly incurred by owners who take money out of their IRAs before they turn 59.5. They now are allowed to take up to $5,000 payouts from IRAs and 401(k)s for having babies or adopting children.There also is a tightening on inherited IRAs and workplace retirement accounts

He said the act not only applies to minimum distributions, but benefits those who are saving for retirement as well.

Time to Save

It’s never too late to start a retirement plan, according to one South Dakota-based financial planner. “I do see people who start saving and playing catch-up later in life,” said Gabe Nelson, of Sioux Falls. The way people do that and how much they save, however, “depends upon the individual's goals and objectives, and when they would like to retire, and how long they would like to work.”

Some people may choose to do a partial retirement, where they continue to work and save. “Every situation is different,” he said. 

Nelson, who owns Gabe Nelson Financial Inc., offers some suggestions for people and businesses: If a company that has fewer than 100 people does not offer a 401(k) plan, for instance, it could look at offering a SIMPLE IRA or even a small business 401(k). 

“With the SECURE Act coming out with additional tax credits, it makes it so the cost of setting up those plans is not quite so expensive,” he said. “What they would want to do, those employers would want to take a look at bringing in an adviser, a financial adviser that understands retirement planning for small businesses, and consult with them as to what type of plan would be the best for their employees, as well as what those costs and benefits would be to the employer.”

He said 401(k) plans are still “very relevant for the foreseeable future because of the higher contribution amounts that are available to the owners as well as the employees.”  

There may be some additional expenses that come as a result of filing a tax return for the retirement plan, as well as other compliance costs, “but the simple piece is the contribution amounts, the tax deductions and the benefits far outweigh the costs of those,” Nelson said. “With the new tax deductions that the SECURE Act has increased for the first three years of adopting plans, this allows for it still to be a very viable option in my opinion, for small businesses and businesses of all sizes.”

Prairie Business Editor Andrew Weeks may be reached at aweeks@prairiebusinessmagazine.com or 701-780-1276. Also, find him on Twitter @PB_AndrewWeeks.

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