This article outlines practical, accounting-informed strategies to help you make smart financial moves as your company grows.

1. Review Entity Structure as You Scale

As your business grows, your current structure may no longer serve you effectively. For instance, sole proprietorships and partnerships often result in higher self-employment taxes, which can limit profitability.

Many businesses transition to an S corporation or Limited Liability Company (LLC) to improve tax efficiency. S Corporations allow owners to take a portion of income as distributions rather than wages—potentially reducing self-employment taxes.

Accounting Tip: Evaluate how much of your income can be shifted into distributions without triggering IRS scrutiny. Review reasonable compensation standards annually with your CPA.

2. Use Section 179 and Bonus Depreciation for Asset Investments

Business expansion often comes with major investments—whether in equipment, technology, or vehicles. Instead of spreading the cost over several years through standard depreciation, you can take advantage of Section 179 and the 40% bonus depreciation rules to deduct a significant portion of the expense in the year the asset is placed in service.

In 2025, bonus depreciation remains at 40%, but it’s scheduled to phase out gradually in the coming years. That makes the timing of your purchases a powerful tax planning strategy.

Accounting Tip: Ensure purchases qualify for accelerated depreciation. Keep detailed records of asset costs, dates placed in service, and business use percentages to support your deductions.

3. Maximize Tax Credits Before Year-End

Don’t leave money on the table. Federal tax credits can reduce your tax bill dollar for dollar. Some of the most impactful credits for expanding businesses include:

• R&D Tax Credit – Qualifying activities include developing or improving products, processes, or software. While related costs must now be amortized over five years, the credit still offers valuable, immediate tax savings.
• Work Opportunity Tax Credit (WOTC) – Hiring employees from targeted groups (e.g., veterans or long-term unemployed) can trigger credits up to $9,600 per hire. WOTC is currently authorized through December 31, 2025.
• Energy-Efficient Commercial Building Deduction (Section 179D) – For upgrades that improve HVAC, lighting, or insulation.

Accounting Tip: Credits require timely documentation and sometimes certification. Your accountant can help ensure eligibility and maximize value.

4. Plan for Multi-State Tax Compliance

Expanding into new states—whether through remote employees, sales, or physical presence—can create nexus, meaning you may owe income, franchise, or sales taxes in those states.

Each state has its own rules. Failing to register or file can result in penalties or interest.

Accounting Tip: Your accounting team should run a nexus study annually. They’ll use revenue data, payroll records, and inventory locations to assess exposure and file accordingly.

5. Create a Tax-Efficient Reinvestment Strategy

Unexpected tax bills can quickly drain cash flow from growth. Work with your accountant to estimate quarterly tax payments and set aside reserves throughout the year.

Then, consider reinvestment strategies that also offer tax benefits—like funding retirement plans (e.g., SEP IRAs, solo 401(k)s), providing health insurance or fringe benefits, or reinvesting in new product development.

Accounting Tip: A cash flow forecast that includes tax liability projections is a powerful tool for decision-making. Revisit this model quarterly as your business grows.

Scaling Smart: Let Tax Strategy Fuel Your Growth

Tax planning is not just about avoiding problems—it’s about uncovering opportunities. Strategic accounting during growth phases can minimize taxes and maximize reinvestment potential.

Don’t wait until tax season. A proactive approach—grounded in accurate financials and strategic foresight—sets the foundation for sustainable, profitable scaling.

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Many individuals want to provide financial assistance to family members to help them experience the joys and pride of home ownership. From aiding grandchildren to purchase their first homes to empowering children or other loved ones to build their personal balance sheets through investing in residential real estate, there are many options to explore regarding how financial support is best provided. Each approach has tax implications, and determining the best approach will require consideration of a number of factors, including:

• Whether the residence is already owned by the family or is being newly acquired;
• The anticipated growth of the home’s value;
• The expected period of time that the family will own the home; and
• The availability of attractive bank financing terms.

This article explores some of the options that may be considered and identifies some of the tax implications that should be evaluated.

Navigating Estate and Gift Tax Exemptions

The estate and gift tax lifetime exemption is currently $13.61 million for individuals and $27.22 million for married couples, under the Tax Cuts and Jobs Act (TCJA), but it is set to be reduced to an estimated $7 million per person beginning January 1, 2026. If the value of your residential real estate is a significant component of your personal balance sheet, transferring those assets outside of your estate may be a prudent way to take advantage of the higher lifetime exemption before the TCJA estate tax provisions sunset.

The Generation-Skipping Transfer Tax

In addition to the estate and gift tax, the generation-skipping transfer (GST) tax often comes into play when wealth owners wish to transfer real estate, like vacation properties or second homes, to younger family members. GST tax is imposed on wealth transfers to grandchildren and more remote descendants that exceed the exemption limits so individuals cannot avoid transfer taxes by “skipping” a generation. The GST tax is levied in addition to gift or estate taxes and is not a substitute for them. The exemption for the GST tax is also $13.61 million per person and the exemption may be applied to gifts during lifetime or transfers through the grantor’s estate. The GST tax exemption is also scheduled to sunset at the end of 2025 and will be lowered to $7 million per person in 2026.

Gifting as a Means to Support Home Ownership

Many individuals consider offering a “deal” to their loved ones by pricing the residence at a level their family member can afford, below the current market rate. However, this situation can create a tax filing obligation because the IRS considers any transfer of assets for less than full and adequate consideration than would be paid “between a willing buyer and a willing seller” (Treas. Reg. §20.2031-1) to be a gift. A gift tax return must be filed to disclose the gift to the IRS, and it must include a qualified appraisal as of the transfer date if the delta between the transfer price and the market value of the gift is higher than the annual exclusion ($18,000 for 2024). When the total value of all gifts made throughout an individual’s life exceeds the lifetime exemption amount (again, currently set at $13.61 million per person), then a 40% gift tax will be assessed on the excess of the total over the lifetime exemption amount.

Rather than gifting an entire property, wealth owners can make a cash gift to a beneficiary to cover the down payment, the monthly mortgage, property tax, insurance payments, maintenance and repair costs, and more. As mentioned above, the Internal Revenue Code provides an annual gift exclusion that allows individuals to give up to $18,000 in 2024 to as many people as they’d like without incurring gift taxes. If the gift is solely in cash, does not exceed the annual exclusion amount, and there are no other gifts to report for the year, a gift tax return is not required.

Gifting Real Estate Through Trusts

Using trusts to gift real estate is a technique often used in estate planning, as many trusts include provisions that allow the trustee to make discretionary distributions to or on the beneficiary’s behalf for health, education, maintenance, and support. The ongoing costs of home ownership, such as real estate taxes, insurance, mortgage payments, and home repairs can fall within the maintenance and support standard, to assist beneficiary’s with home ownership expenses.

Some types of trusts can be structured to continue for several generations, allowing a wealth owner to provide for home ownership even for decedents who are not yet living at the time the trust is created, if desired. This is done by allocating the GST exemption to the trust. Some trusts qualify for the $18,000 annual gift exclusion too, if there is a single beneficiary and all the assets and income go to the beneficiary or their estate.

Using estate planning techniques like a qualified personal residence trust (QPRT) may allow individuals to transfer a residence to their children, and still allow that individual to live in the home.  In addition to reduced transfer taxes, any future appreciation in the residence after the QPRT is established is transferred to children without being subject to additional transfer tax. Learn more about QPRTs here.

Living Arrangements and Reduced Rent Options

If you already own the home you want to gift or transfer, you could consider allowing a family member to live there rent-free or at a reduced rent. An annual gift tax return may be required if the market value of the reduced rent is higher than the annual exclusion, but a key advantage of this approach is that if you intend to transfer the property to the beneficiary upon your passing, maintaining the asset within your estate ensures it will benefit from a step-up in basis. This is an attractive option for a home that has a very low basis and has appreciated significantly over many years of ownership.

Loan Options for Home Purchase Assistance

Another option you can consider is loaning your family member the money to purchase the home from you at fair market value. However, there are protocols that must be followed to avoid running afoul of IRS regulations. Such loans must be formally documented, and payments made according to the terms of the agreement. Interest rates on related-party loans must be set, at a minimum, at the interest rate provided by the IRS in monthly published Revenue Rulings (known as the Section 7520 rates), and other arm’s length terms must be observed.

Of course, the grantor could forgive part of the loan at any point during the loan term. If the loan forgiveness amount is $18,000 or less per year, then it should qualify for annual exclusion gifting and not reduce the grantor’s lifetime estate and gift exemption.

However, it’s important to avoid a predetermined arrangement for forgiving the loan annually under the annual exclusion, as the IRS might view this as a single gift made in the first year, resulting in an inadvertent reduction of the donor’s lifetime exemption.

Financing Strategies for Home Purchases

Many families have relationships with their banking partners that allow them to obtain favorable interest rates or terms. In addition, they may own other assets, such as brokerage accounts, that may be used as additional collateral to support a loan, although it would not be advantageous to sell those assets. Using such assets as collateral usually entails the addition of restrictions that prevent the disposition of the assets while being held for collateral without prior authorization from the financial institution. A parent or grandparent can serve as a personal guarantor on the loan between the beneficiary and the bank, but there may be a gift value to a personal guarantee, and consideration should be given as to whether this triggers a gift tax filing requirement.

Consulting with Advisors for Tailored Strategies

As you can see, there are many ways in which wealthy individuals may offer to help loved ones achieve home ownership or favorable living arrangements. Talking with your advisors will help determine which options accomplish your goals while utilizing tax-efficient strategies. We can address your inquiries and assist in crafting a personalized strategy that enables you to transfer your wealth not merely as a gift but with meaningful intent and purpose, aligning with your family’s home ownership goals and financial well-being.

Written  by Abbie M.B. Everist. Copyright © 2024 BDO USA, P.C. All rights reserved. www.bdo.com

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For many business owners, taxes often represent a hurdle to clear rather than a strategic asset to leverage. However, those who look beyond mere compliance can unlock the transformative power of tax planning as a key driver for sustainable business growth. Rather than viewing tax as a static annual obligation, repositioning it as a dynamic component of your business strategy can substantially impact your bottom line. Effective tax planning goes beyond preparing for tax season; it integrates with your company’s financial decision-making process, influencing everything from cash flow management to long-term investment strategies. This article outlines practical steps for business owners to harness tax planning effectively in their growth strategies.

Comprehensive Tax Analysis

Initiate your tax strategy by comprehensively analyzing your company’s financial situation. Assess all aspects—revenue, expenses, investments, and potential risks—to understand your tax obligations. Engaging with financial advisors to conduct this analysis can uncover valuable tax-saving opportunities that align with your business growth plans.

Tax Strategy and Business Goals Alignment

Ensure that your tax strategies are in sync with your business objectives. If expansion or capital investments are on the horizon, tailor your tax approach to support these aims. This could involve tax planning methods like income deferral or identifying deductions that can be claimed to reduce taxable income, thereby aligning with your business’s future financial goals.

Tax Credits and Incentives Utilization

Stay informed about tax credits and incentives that could benefit your business. Regularly review government offerings for R&D, environmental initiatives, or employment practices, and consider how to integrate these into your tax planning effectively. Consult with tax professionals to apply these credits in the most advantageous ways for your business.

Income and Expense Timing

The timing of income recognition and expense incurrence is crucial. Make informed decisions about when to realize income and incur expenses to manage your tax liabilities effectively. Adjusting the timing can lead to a more favorable tax position and improved cash flow, aiding reinvestment in your business.

Technology Investment for Tax Planning

Invest in technology to enhance your tax planning and business management processes. Accounting software and automation tools can provide accurate, real-time data, allowing for better financial decisions. This technological support is essential for maintaining efficiency and compliance with tax obligations.

Strategic Employee Compensation

Review your compensation strategies to optimize tax outcomes for the business and employees. Consider various compensation models, such as deferred compensation plans or other fringe benefits, which may offer tax advantages while supporting your talent acquisition and retention objectives.

Retirement Planning for Owners and Succession

Business owners should view retirement planning as a component of the company’s tax strategy. Structuring retirement savings tax-efficiently benefits both the individual’s and the business’s future. This planning also involves considering the tax implications of business succession and transition.

Tax planning is more than compliance; it’s a critical element of a sustainable business strategy. While navigating through these areas, it’s essential to maintain a forward-thinking approach, utilize available resources, and continuously adapt to changing tax laws. Before implementing any tax-related changes, consult a CPA to ensure the strategies are appropriate and beneficial for your business’s unique context. This careful and informed approach to tax planning will support your business’s growth and stability over the long term.

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In the dynamic world of real estate development, not every project reaches completion. Changes in market conditions, regulatory landscapes, or project viability can lead to the difficult decision of abandoning a project. While such situations are challenging, understanding the tax implications and opportunities for deductions can mitigate financial losses. This article outlines the key considerations for real estate developers and investors on when and how to write off abandoned project costs to maximize tax benefits.

Understanding Abandoned Project Costs

Abandoned project costs refer to expenditures associated with a real estate project not completed or carried through to fruition. These costs can include land acquisition expenses, preliminary survey fees, architectural and engineering design costs, and other developmental expenses incurred up to the point of abandonment.

When Can You Deduct Abandoned Project Costs?

The Internal Revenue Service (IRS) allows taxpayers to deduct losses for abandoned real estate projects, provided conditions are met. To qualify for a deduction, the abandonment must be absolute, meaning there must be a clear intent to discard the property and no expectation of recovering its cost. The decision to abandon a project should be substantiated with evidence such as board resolutions, public announcements, or documented changes in strategic direction.

Maximizing Deductions for Abandoned Projects

It’s crucial to strategically time the deduction to align with your tax profile and current income composition to maximize deductions for abandoned real estate project costs.

Abandoned project costs are typically classified as ordinary losses. Recognizing these costs as ordinary losses can be highly beneficial if you’re in a year with a significant amount of ordinary income. Ordinary losses reduce your ordinary income, typically taxed at a higher rate than capital gains.

This strategic timing hinges on intricate tax code nuances. Furthermore, the taxpayer should be careful not to treat the abandonment as a sale or exchange, as such transactions could trigger capital losses, which could cause significant tax inefficiencies. Consulting with a tax professional who can navigate these complexities and optimize your tax outcome based on your specific financial scenario and the timing of your abandoned real estate project is advisable.

Special Considerations for Developmental Costs

Abandoning a real estate project is never an easy decision, but understanding the tax implications and opportunities for deductions can provide a silver lining.

Developmental costs can be complex, with specific IRS rules determining their treatment for tax purposes. It’s important to consult with a tax professional to ensure that these costs are correctly classified and that the timing of any deductions is appropriate. For example, the IRS has specific provisions regarding the abandonment of depreciable property, which may require adjustments to the basis of the property before a loss deduction can be claimed.

For expert guidance on the costs associated with abandoned projects, reach out to Walter Shuffain. Our firm is at the forefront of the Real Estate Industry and is equipped with a team of specialized advisors with comprehensive knowledge of the real estate market. Discover the wide range of services we offer to the Real Estate sector.

The post Writing Off Abandoned Project Costs for Real Estate: A Guide for Maximizing Deductions appeared first on Walter Shuffain.

In this article, we explain why 2024 is an ideal year to prioritize your wealth transfer plans.

Current Tax Laws Double Lifetime Giving Exemption

For affluent individuals and their families, estate taxes can represent one of their largest tax liabilities. IRS rules allow certain amounts of an estate to be transferred free of taxes to family and friends, on an annual basis (the limit is $18,000 per person in 2024) and also grant each taxpayer a lifetime giving exemption. Beginning in 2010, that lifetime exemption was $5 million per person indexed for inflation. The Tax Cuts and Jobs Act (TCJA) roughly doubled the giving limit, raising the lifetime exemption in 2024 to $13.61 million for individuals and $27.22 million for married couples.[1]

The caveat—and it’s a big one—is that those expanded exclusion amounts expire at the end of 2025, with lifetime exemption totals reverting back to an estimated $6.40 million per person.[2]  Individuals and families seeking to lower their taxable estate may not see such a generous opportunity from the government again, so it’s critical to develop giving plans and put them into motion before it’s too late.

Gifting in a Bear Market Is Like Buying Low

Recent stock and bond market selloffs may make you think that now is a risky time to consider giving away a large portion of your estate. But for those in a position to take full advantage of the lifetime exemption, doing nothing could result in burning up much more in potential tax savings than any recent market losses.

In fact, initiating a giving program during a bear market has the possibility to increase the value of your gifts to future generations. When transferring common stock, for example, you can gift more shares when values are down, potentially providing a larger base of appreciation for the recipient. And, as the donor, a downturn means you could be able to transfer a greater portion of your wealth out of your estate.

Transferring the maximum amount allowed on your terms and timetable not only removes those assets and their potential appreciation from your estate, but it can also add meaning to the gifts by allowing you to see your children and grandchildren enjoy those assets during your lifetime.

Value of Gifting Today vs. Gifting in the Future

Failure to utilize the full expanded exclusion amount of $13.61 million per individual prior to its lapse at the end of 2025 may result in the unused amount being subject to estate or gift tax.

Key takeaway: An additional $8.33 million is paid in estate taxes by the couple who failed to utilize the expanded exclusion amount before it expires in 2025.

A Note of Caution

The generation skipping transfer (GST) tax exemption may also come into play if gifts are given to grandchildren. Gifts to grandchildren and subsequent generations have GST tax considerations. The gift tax exemption and the GST tax exemption start off the same (at $13.61M per individual) but can, and often, get used at different rates. If you have never used your gift tax exemption or GST tax exemption, you should be fine. However, you must be careful as a gift can result in both gift tax and GST tax being imposed on that gift.

Customize Your Wealth Transfer Strategies

Effective wealth transfer can be accomplished in a number of ways and should be customized to your personal circumstances. Your tax advisor can explain the pros and cons of various gifting options to ensure you receive the full estate tax benefits while retaining a measure of flexibility and access to certain assets if needed. A professional tax advisor can help you prioritize the types of assets to be gifted, such as cash, investments, or business interests.

Various techniques, including using irrevocable trusts and grantor retained annuity trusts (GRATs), can be employed to limit estate taxes when the wealth owner dies. Such trusts are established as a method of transferring wealth out of the owner’s estate for the benefit of family members (e.g., children, grandchildren, etc.). It is important to note that trusts have specific risks and challenges that must be understood before executing transfers of significant wealth. Qualified estate planning advisors also can help identify alternative gifting options, such as promissory notes and intrafamily loans, that may avoid some of the pitfalls of trusts.

When considering how much wealth should be transferred for the benefit of your heirs, thoughtful consideration should be given to how much wealth you should retain in your estate to maintain your lifestyle. Difficult decisions must be made during the estate planning process that weigh current cash flow needs with estate tax savings and preservation of family legacy. A qualified estate planning professional can model various scenarios to help you determine the amount of gifting that is right for you.

The Clock Is Ticking … Begin the Discussion Now

The window on making the most of the expanded lifetime exemption and shielding a significant portion of your estate from Uncle Sam will close at the end of 2025. We are available to answer many of your questions and help formulate a customized plan that allows you to not just gift your wealth, but gift it with a purpose.

[1] IRS, “IRS provides tax inflation adjustments for tax year 2024,” November 9, 2023

[2]  Figure based on estimate of $5 million exemption in 2010 indexed for inflation through 2025

The post We May Never See a Better Environment for Transferring Wealth … Here’s Why appeared first on Walter Shuffain.

Individual Tax Planning

Change is constant, which means your tax strategy needs to evolve year after year as laws and policies change. This guide includes tax planning highlights and considerations for federal tax planning.

Business Tax Planning

Tax planning remains crucial for businesses seeking to maximize cash flow by effectively managing their long-term tax responsibilities. Below are year-end guides on various tax topics that impact business tax planning.

State and Local Tax

Discover expert insights and practical guidance for companies with 2023 year-end SALT planning and get a head start on your 2024 planning in this article.

Partnerships

The IRS has actively challenged partnerships’ tax positions in court over the past year, and the agency is dedicating funding and resources to examine partnerships further. There are a number of tax implications partnerships should consider, and they should plan for year-end and beyond. Here’s what you should be looking into.

Real Estate

When it comes to real estate transactions, understanding the tax implications is crucial. As we approach the end of the year and prepare for the year ahead, real estate businesses should take the time to review how current tax rules apply to their transactions. This guide will help you plan ahead and ensure your real estate transactions are structured in the most advantageous way possible.

Financial Transactions

Failing to understand the tax rules for financial transactions and instruments and how they apply to your business can be detrimental. Thankfully, companies can take some steps over the year to ensure they are compliant. Follow these considerations as part of your year-end tax planning.

Business Incentives & Tax Credits

Quite a few tax incentives and credits have been getting a lot of hype over the past few years. Here are a few you can consider including in your tax strategy for your business.

Tax Accounting Methods

Tax accounting methods determine when a taxpayer’s income is recognized and costs are deducted for tax purposes. To drive tax savings, taxpayers should strategically adopt or change tax accounting methods. However, the rules are complex. That is why we put together this guide on what you should consider for 2023 and 2024.

Each guide provides information and insights on what to consider for your year-end tax planning. As you examine your tax strategy, the Walter Shuffain team is available to answer your questions. Don’t hesitate to contact us!

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Single-Sales-Factor Apportionment

Effective for tax years beginning on and after January 1, 2025, Massachusetts corporate taxpayers will be required to apportion net income using a single sales factor. That is a departure from current law, which requires corporations (other than qualifying manufacturers) to use a three-factor formula of property, payroll, and a double-weighted sales factor.

Financial Institution Receipts From Investment and Trading

Also effective for tax years beginning in 2025, H. 4104 repeals the current sourcing of financial institution receipts from investment and trading assets and activities, which generally sources those receipts to the taxpayer’s regular place of business (where day-to-day investment and trading decisions are made). Beginning in 2025, those receipts – interest, dividends, net gains, and other income from investment assets and activities and income from trading assets – will be sourced using a fraction. The numerator will be the financial institution’s Massachusetts-sourced receipts from financial activities, such as lending, credit card receivables, leasing, and the denominator will be total receipts, excluding income from investment assets and activities.

Short-Term Capital Gains

For Massachusetts personal income tax purposes, the legislation reduces the short-term capital gains rate to 8.5%, retroactive to January 1, 2023. Previously, Massachusetts taxed any gain from the sale or exchange of capital assets held for no more than one year at a rate of 12%.

‘Wealth’ Taxes

• The legislation increases the state estate tax threshold to $2 million for decedents dying on or after January 1, 2023. It also alleviates the so-called cliff effect of the Massachusetts estate tax, whereby estates valued at over $1 million were subject to tax on their entire value. The legislation grants a state estate tax credit of up to $99,600 as relief and changes how the tax on out-of-state real estate and tangible personal property is calculated.
• Effective January 1, 2023, Massachusetts enacted the millionaires surtax, an additional 4% state income tax on the portion of a taxpayer’s annual income that exceeds $1 million. For income earned on or after January 1, 2024, H. 4104 requires married couples to file Massachusetts joint income tax returns for any year in which they file federal joint income tax returns.
• H. 4104 also requires the Department of Revenue to study the effect of an additional surtax of up to 4% on pass-through entities (PTEs) that have made the Massachusetts PTE tax election.

Insights

• Affected taxpayers should model the impact of the Massachusetts apportionment changes that will be effective for tax years beginning January 1, 2025, particularly if applying economic nexus or other state nexus positions to avoid Massachusetts sales factor throwback and/or throwout.
• PTEs and their owners should watch for the Department of Revenue’s study and possible recommendations concerning a PTE surtax.” Like requiring married joint filing when a federal joint return is filed, a 4% surtax on electing PTEs is intended to address avoidance of the millionaires surtax that went into effect earlier this year.

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Signed into law in August 2022, the IRA’s stated intent is to reduce carbon emissions by 40% by 2030 and boost domestic energy production and manufacturing, as well as reduce the deficit and fight inflation. The new law both introduces and expands tax credits available for those investing in clean energy and extends their applicability, in many cases by up to 10 years.

• • The 179D Energy Efficient Commercial Buildings Deduction gives building owners a deduction of up to $5.00 per square foot for building or renovating energy-efficient buildings
  • The 45L New Energy Efficient Home Credit is a $2,500 tax credit for single family and multifamily developments that comply with Energy Star standards as well as a $5,000 credit for homes that comply with the Zero Energy Ready Homes Program.

Can the IRA’s intentions become reality?

The IRA’s tax incentives are designed to support a permanent shift toward clean energy in current and future construction projects. However, the dollars that those incentives free up for real estate and construction companies may not offset the significant investment that would need to be made to qualify for the incentives. For example, larger multifamily construction projects may incur more costs than the $500 per unit increase in the Sec. 45L credit to meet the new standards.

The IRA has established longer terms for tax credits and deductions, however. While clean energy tax incentives exist today, many of them have required renewal every one to two years. Uncertainty regarding tax credit renewal has historically made it more challenging for companies to plan for the total cost of construction. With the extension of these tax incentives, some by as many at 10 years, real estate and construction companies are able to plan future investments around these incentives with less risk.

Additionally, the IRA has intentionally focused on domestic supply chains through expanded incentives outside of historical investment in clean energy. Therefore, the domestic supply chain-focused provisions should indirectly benefit the real estate and construction industries should there be a rise in clean energy production in the U.S.

Many of the provisions within the law will require further guidance from the Department of the Treasury and IRS before they are able to be implemented. For example, guidance is required for a 15% corporate alternative minimum tax (CAMT) based on book income, as well as credit transferability for investment tax credits (ITCs), which are tax credit incentives for investing in clean energy. The IRA modified and extended the ITC program to provide a 30% tax credit for qualifying investments in clean energy that meet prevailing wage and apprenticeship requirements. However, the ITC is worth only 6% to those that don’t meet these requirements, though bonus adders may be stacked on top of the ITC (see table below), and safe harbors do exist based on project size and start of construction deadlines.

Real estate investment trusts (REITs) in particular may be able to take advantage of ITCs in various ways, whether to monetize the credits or to use them to purchase solar facilities. Depending on the implementation of the investment tax credit transfer, REITs may also stand to gain discount a limitation on ITCs for REITs if they choose to transfer the credit. Ultimately, REITs could own a solar facility outside of traditionally utilized taxable REIT subsidiaries and take advantage of the ITC by monetizing it, should the anticipated guidance facilitate transferability.

Tax Incentives to Watch

Hit the Ground Running with a Feasibility Analysis

Though prevailing wage and apprenticeship guidance has recently been released addressing the IRA’s two labor requirements for clean energy developments to provide basic hourly rate of wages and benefits standard for the region of work and to employ a certain amount of registered apprentices to qualify for the bonus tax credit rate, other implementation guidance is yet to be announced by the U.S. Treasury Department and the IRS. As a result, many companies are unsure of how to best incorporate the law’s provisions into their development plans. Additionally, though the legislation has been touted as a step in the right direction by U.S. lawmakers, some international players have claimed that it violates international trade agreements and prioritizes domestic sourcing of building materials energy where cross-border trade practices are in place.

As we wait for further guidance, real estate and construction companies should work closely with their tax advisors to plan for a smooth transition by preparing the necessary documentation and certifications and performing a feasibility analysis. A feasibility analysis evaluates a company’s projects and investments, as well as the incentives that will likely be applicable. From there, it maps out the potential business decisions that a company will need to make, depending on future guidance regarding the IRA.

A feasibility analysis can follow five simple steps:

1. Map out the project’s goals. Look into intended investments your company plans to make for its building project.
2. Split investments up into distinct groups. Section relevant investments into qualifying categories like clean energy storage, solar energy or wind energy.
3. Match investments to potential IRA incentives. Compare the list of intended investments with the list of available tax incentives and determine overlap.
4. Conduct a cost-benefit analysis of implementing a tax incentive. Calculate the degree of investment required to achieve eligibility and the return on investment the tax incentives would offer.
5. Identify paths to substantiate claims to incentives. Pull together the documentation required to prove existing or intended adherence to tax incentive requirements.

Another step companies can take to prepare for the implementation of the IRA’s tax incentives is to ensure the company and its partners are registered with Energy Star and are following the proper steps for Sec. 45L eligibility. These steps can be taken regardless of whether it is ultimately advantageous to pursue the various incentives, as it can help companies:

• • Remain aligned on project priorities
  • Identify financial goals
  • Stay abreast of current tax incentive offerings

By conducting feasibility analyses, preparing to substantiate claims for tax incentives, and ensuring compliance with industry accepted energy efficiency standards, real estate and construction firms can make the most of the benefits the IRA has to offer.

Careful planning must be balanced with flexibility, however, in order to be able to respond to any eventual changes to the law. Relying on a professional services provider to navigate the IRA can help prevent missed tax credits that result in cost savings or spending too much on qualifying for incentives that may not deliver a return on investment.

The post Costs and Benefits of the Inflation Reduction Act for Real Estate & Construction appeared first on Walter Shuffain.

“Uncertainty” is the keyword as we sit at the beginning of 2023. Rising interest rates, inflation and geopolitical strife continue to challenge economic and market stability. But with about $1 trillion in committed capital sitting on the sidelines, deals will still need to be made.

What is in store for 2023? Will “low-quality” companies comprise a greater proportion of deal volume? Will gaps between buyers and sellers narrow? Will the Federal Reserve begin lowering interest rates mid-year? Here we look at some of the trends we believe will play out over the next 12 months.

Prediction #1: Large-cap deal flow will give way to more middle-market deals

In an inflationary environment in which interest rates are the highest they have been since the Great Recession and lending has tightened, private equity firms will continue to focus their energies on add-ons or carve-outs.

While multi-billion-dollar platform buyouts will still happen — the rout in the public markets last year provides welcome comps for larger buyouts — we predict a sizeable proportion of private equity M&A to be smaller to mid-size strategic plays that allow firms to put their capital to use. Competition over the limited number of quality assets will continue to be fierce, so we will see more deals of lower quality, as we did at the end of 2022.

During this period of ongoing uncertainty, due diligence continues to expand from the compressed timelines we saw during the deal frenzy of late 2020 and 2021. Firms will also continue to look to work with vendors who can supply a majority, if not all, of their due diligence needs.

Prediction #2: Fundraising cycles will continue to be lengthy

The amount of time firms take to raise funds has been increasing, and that dynamic will persist into 2023. The average number of months to final close in 2022 hit 20 months for the first time since 2010, according to Preqin data. That is an increase from 11 months in 2019 pre-pandemic; since then, the average number of months to close has ticked steadily upward, reaching 16 in 2021.

Last year, we saw limited partners (LPs) asking their general partners (GPs) to push some of their fundraising efforts into 2023 because they were unable to keep up with the re-up requests from GPs raising subsequent funds. Given the amount of capital raised in recent years and the fact that many funds that raised in 2022 never activated their funds due to the macro deal environment, we expect to see a delay in the deployment of capital, compounding the calls of capital on LPs if they commit to new funds.

LPs who have experienced the “denominator effect” — becoming overallocated to private equity given the public market decline — will be reluctant to make new commitments and may instead sell their stakes this year.

The declining rate of exits, of course, exacerbates these dynamics. Fewer exits mean fewer distributions to LPs. For LPs re-committing capital, we foresee risk aversion influencing a trend of dollars flowing to fund managers with proven (and lengthy) track records. However, emerging managers specializing in sectors align with LPs’ strategies and values will attract investment.

At the same time, the dynamics around fundraising may help to fuel the secondary market more and increase diversity among private market participants (think retail investors and high-net-worth individuals).

Prediction #3: Firms will take advantage of market slowdown to plan exits

The appetite for exits has steadily declined since the fourth quarter of 2021 as firms have opted to hold onto their investments rather than sell into a weak market. Last year, the majority of exits were secondary buyouts and trade sales, according to Preqin. In 2023, we will see more sponsor-to-sponsor deals as well as a healthy number of GP-led secondaries (continuation funds). However, the SEC’s new rules for registered investment advisors (RIAs) may affect the pace at which GP-led secondaries roll out.

Exits by type. 2021-2022

According to Private Equity News, GP-led secondaries today comprise about half the secondary market transaction volume, up from less than one-quarter of the market in 2017, and by 2025 is estimated to exceed $200 billion.

The trend of PE firms evaluating exit planning strategies earlier in the deal lifecycle will continue through 2023. Fund managers will approach the current market slowdown as an opportunity to prepare their investments for exit and execute on the necessary steps to be in position for an IPO or other exit when the market recovers.

Prediction #4: ESG strategies will remain in the spotlight

Private equity fund managers have been focused on incorporating environmental, social, and governance (ESG) risk factors and policies into their due diligence, operations, and brand identity. ESG will remain a value driver in 2023. As private markets look to ESG as a salve for talent recruitment and retention challenges, macroeconomic volatility, and suboptimal exit values, fund managers are increasingly grounding their investment theses in ESG materiality.

_{Source: BDO Private Capital Pulse Survey – Spring 2022}

According to BDO’s Spring 2022 Private Capital Pulse survey, 50% of fund managers said they would deploy the most capital to setting up impact funds or investing in targets with ESG-focused linked themes. Nearly all (95%) evaluate targets’ ESG potential as part of due diligence. At the other end of the deal lifecycle, 39% identified adopting an ESG strategy and reporting program as a new tactic to facilitate exit strategy.

Private equity’s embrace of ESG is unsurprising: ESG risk assessment is still fairly nascent, and private equity thrives on capturing value from innovation. At the same time, an overwhelming majority of LPs evaluate firms’ ESG risk exposure and practices when making investment decisions (in BDO’s Spring 2021 survey, 94% of LPs said it was either “very” or “somewhat” important that fund managers’ investment strategies include ESG criteria). They see ESG screening as critical to value creation and risk mitigation, protecting investments from risks like health and safety violations, fraudulent governance practices, and extreme weather. And funds, in turn, enjoy more lucrative fundraising opportunities, superior brand reputation, and lower-cost capital.

Prediction #5: Human capital resources will remain tight

The labor market is tight, and employers’ priorities when it comes to their workforce are to retain existing talent and reduce hiring. Of the areas of economic concern fund managers were most concerned about, unemployment rates and the availability of talent ranked above inflation and interest rate increases, according to BDO’s Spring 2022 survey.

Economic Instability Areas of Concern, Ranked

1. Regulatory changes
2. Geopolitical or social instability
3. Unemployment rates and the availability of talent
4. Inflation
5. Interest rate increases
6. Consumer spending
7. Income and wage trends

_{Source: BDO Private Capital Pulse Survey – Spring 2022}

Labor, interest rates, and inflation are caught in a cause-effect cycle. To counter inflation, the Fed raised interest rates seven times in 2022. The goal is to increase borrowing costs for businesses so they cut back on hiring, theoretically slowing wage growth and impeding consumer spending, and ultimately lowering inflation.

Despite the Fed’s focus on the labor market as part of its effort to bring inflation back to 2%, the labor market has not shown signs of slower wage growth just yet. The first jobs report of 2023 showed 223,000 jobs were added to the economy, most of which were in industries the pandemic hit hardest, like hospitality, healthcare, accommodation, and food services. Outside of the technology industry, there have not been massive layoffs.

There is lively debate around whether the Fed will begin reducing interest rates this year. The minutes from the Federal Open Market Committee’s most recent meeting in December 2022 reveal that the timing is not right to reduce interest rates, but some market experts believe the Fed could lower them toward the end of 2023.

Prediction #6: Private credit financing will continue to grow as part of the share of debt — with caveats

With interest rates at the highest they have been in 15 years, leveraged buyouts are an unappealing prospect for many private equity firms. Yet deals must happen. With high-yield bond and syndicated lenders in skittish territory, dealmakers have been turning to private credit financing — loans negotiated outside the traditional track of bank lenders. Though interest rates may be higher than those offered by traditional lenders who may be more risk averse in today’s climate, private credit lenders are less prone to pull out of a deal at the last minute, enabling fund managers to get to deal close.

While we foresee private credit will continue to gain share of debt, if economic conditions do not improve and a recession does take hold, these lenders could look to prioritize deals in sectors or industries considered recession resilient, such as SaaS software solutions and healthcare technologies.

Debt financing in the private markets rose from less than $500 million a decade ago to $1.2 trillion at the end of 2021, according to Preqin. Preqin also predicts that assets in private debt funds will account for $2.3 trillion by 2027.

Prediction #7: Within value creation strategies, the focus will fall on expense control and operating improvements

The high-valuation deal environment of 2021 began to challenge traditional methods of value creation, forcing firms to seek new ways of generating a return on their investments. Fund managers are using more value creation tactics in more combinations than ever before and are more hands-on with their investments — working alongside portfolio company management to develop digital transformation strategies, for example, and increasing their focus on deepening their industry expertise.

Increased costs arising from inflation may not be recoverable by passing them onto the consumer, further compressing margins and pressuring value creation strategies. Looking forward, fund managers will focus on controlling expenses within this high-inflation environment and making operational improvements — their top two biggest post-M&A challenges, according to BDO’s spring 2022 survey.

2023: Further testing ground for private equity — but not without its opportunities

The private equity asset class is nothing if not creative. With plenty of dry powder available, we expect to see deals return to more normal pre-pandemic levels. Quality assets continue to be fewer and further between, so we anticipate more variation in deal makeup — whether minority stakes, deals with greater ratios of equity, sponsor-to-sponsor transactions, or non-platform acquisitions.

To meet the dealmaking challenges of 2023, value creation will be front and center.  We expect firms to continue to leverage data analytics — their top tactic for value creation and exit strategy, according to BDO’s spring 2022 survey — for insights into businesses and to continue to drive innovation.  As in 2022, firms that succeed in 2023 will have a strong value creation plan complemented by a comprehensive understanding of risk and a suite of strategies informed by scenario planning.

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