A critical component of our mission of increasing waste diversion at The Green Mission Inc. includes tax incentives for the donation of deconstructed materials and personal property. Our goal is to maximize the percentage of diverted waste from tipping to a landfill towards the alternative of donation to a non-profit or government organization. Our experience finds clients are more likely to deconstruct and donate rather than demolish if they can take a tax deduction that allows them to offset the higher costs of deconstruction as well as a slightly longer timeline to allow for deconstruction. The same theory holds when it comes to personal property within a residence or corporate building—the potential tax deduction drives behavior towards donation and away from dumping should a home be renovated or corporate occupants move in or out of a business building.
These tax benefits, however, must be examined in their present form for the applicability to a client’s particular tax situation. For the individual taxpayer, the deductions are taken on the annual filing return form 1040 Schedule A “Itemized Deductions.” With the implementation of the Tax Cut and Jobs Act (TCJA,) the standard deduction has been raised to $24,000 for married taxpayers, $18,000 for Head of Household and $12,000 for single. This means that the four components of the Itemized Deduction Schedule A, must exceed the standard deduction to be taken. Those four components are:
- Medical Expenses in excess of 7.5% of Adjusted Gross Income
- State and Local Income Taxes capped at $10,000
- Real Estate taxes on up to $750,000 of a mortgage
- Charitable Contributions
Deductions for donations of deconstructed materials are taken as Charitable Contributions. They are taken as non-monetary charitable contributions to be exact. An appraisal is required when a single donation or grouping of similar donations exceeds $5,000 in value. What this means in practice is that high-earning and wealthier taxpayers are those who can typically take these deductions because they tend to cap out the $10k on #2 above and have mortgages higher in value with higher associated interest deductions. Unfortunately, this leaves many taxpayers without the incentive to donate personal property or deconstructed materials because they cannot itemize deductions.
Corporations take the deductions on their annual filing form 1120. S-Corps, LLCs with single members or partnerships are pass-through entities and donations flow-through to their form 1040, described above. Corporations can take up to 10% of net income in charitable contributions after adding back some revenue items. However, for a corporation to donate personal property, they must have basis in the property. Basis essentially means how much property is worth on the books of a corporation and rarely correlates with actual value. This is because businesses are able to depreciate assets to take advantage of deducting depreciation expense against their income in a set year format depending on the type of property. If teakwood desks are donated to charity but they have been fully depreciated on the company’s books, they receive no charitable contribution because the basis of the desks is $0. Hence, we have lost another waste diversion driver when the assets are considered financially worthless.
Another area making donation and waste diversion difficult is with regard to real estate investors or dealers known to “flip” properties. Often, beautiful older but smaller homes are demolished to make room for a fancy new home to be rebuilt on the land. In most cases, the land is worth more than the attached property. The IRS differentiates between the types of real estate professionals. First, the distinction must be made between a real estate investor vs. a real estate dealer. An investor (individual or legal organization) purchases property with the intent of holding and producing a capital gain. Investors can be entitled to capital gain treatment at the time of sale. Real estate dealers have the intent to purchase real estate for sale rather than investment. Dealers are assumed to have their business purpose as “buying and selling real estate in numerous frequent or continuous transactions.” When classified as a dealer, income and losses are ordinary income and are precluded from using capital gain treatment. Long-term capital gain treatment provides preferential tax treatment compared to ordinary income or short-term capital gain treatment. In 2019, capital gains tax rates are 0%, 15% or 20% whereas the ordinary income tax brackets are 10%, 12%, 22%, 24%, 35% or 37%. Long-term means the assets are held longer than one year. By cutting real estate dealers off from taking tax deductions for deconstructed materials or requiring a one-year holding period for real estate professionals, this disincentivizes deconstruction and donation and makes a quick demolition and subsequent trips to the landfill and tipping fees the economical way to go.
As a CPA I often muse about the perfect “Green” tax world and how these changes in policy and tax codification could push waste diversion rates up and landfill tips down. These changes would account for the above-discussed current tax laws and also bring the local and state taxing authorities into the equation. In certain locales, deconstruction ordinances have been enacted to not just promote waste diversion but to create a new highly skilled labor force and industry involving the deconstruction of buildings. This has been a shot in the arm to nonprofits offering workforce development training programs for an underserved population. The deconstruction industry would demonstrate increased growth and stability as the country recognizes the need for reuse and repurposing over the negative trends of landfill dumping with the associated risks of carbon emissions, methane production and groundwater contamination. I view the local and/or state ordinances as the “stick” by which people and corporations are made to make the environmentally friendly alternative. Tax incentives must continue to be the “carrot”—the crisper and juicier the better.
With that being said, here is my waste diversion tax wish-list.
- 1.Individual Taxpayers 1040 Tax Credit: Moving non-monetary and monetary charitable contributions to a tax credit, and a refundable one at that, would provide opportunities for waste diversion to all income and wealth levels among the population. While a tax deduction reduces the base upon which a tax is levied, a credit decreases the tax owed dollar for dollar. A credit is worth more than a deduction. However, if the credit is not refundable, those in the population who pay very little in federal income taxes (but still pay in full FICA taxes!) would not be able to take the credit because they would not have adequate income for which the credit could offset. A refundable credit means it provides a refund over and above taxes paid. The current refundable tax credits are the Earned Income, Child and American Opportunity Tax Credits. Before I receive the question of the “fairness” of refunding funds never paid in federal income taxes in the first place, it is wise to remember that FICA taxes are paid by all taxpayers regardless of their income level. Couple this with middle to lower income earners typically having their income comprised of all w-2 income and little to no investment income in the form of long-term capital gains and the scenario where the secretary making $45,000 pays a higher effective tax rate than the millionaire plays out. The waste that could be diverted by moving to a credit allowable to everyone and not tied to the Itemized Deductions on Schedule A should be considered. This is an admitted pipe-dream with a remote chance of being enacted through the arduous congressional process of changing tax law. Additionally, determining the amount of credit and correlation to appraised value would be challenging.
- 2.Remove Basis Limitations for Corporate Donors: Removing the basis limitation for charitable donations for corporate donors would move the needle towards donation over demolition quickly. Many corporations with whom we work, ultimately determine not to donate because their assets have been fully depreciated and it is much cheaper to hire a crew to break and dump all tables, chairs, desks, lamps, computers and the many other items that make up an office into a dumpster rather than taking the time to carefully disassemble cubicles, carefully pack computers and take the time to find nonprofits or government entities to take the donation. By removing the basis limitation and allowing corporations to take the appraised market value of the donation would provide a huge incentive for donation. This would also produce a groundswell of office materials needing a home and push for facilitating a nationwide system of tracking who can donate what allowing smaller non-profit organizations and governments with notifications when needed property become available. Even organizations requiring a long drive for retrieval may find that more affordable than purchasing new.
- 3.Allow Real Estate Investor and Dealers to Donate without Ordinary Income Treatment: Real estate investors hold the key to prime residential real estate properties with beautiful and valuable architectural structures and interior fixtures that could find a reuse on the second-hand construction materials and furnishings market. However, the motivation to donate once the home has passed from the original owner to the real estate investor or dealer do not exist because of the ordinary income treatment of any charitable donation. Oftentimes the homeowner can be contacted and made aware of the choice for donation prior to sale to the investor or dealer, but more often, the investor has already made the purchase and do not have any tax incentives for deconstructing and donating the materials. Removing the ordinary income treatment for dealers and removing the short-term capital gain treatment for investors (which is really just ordinary income treatment) would provide a huge incentive for donation.
- 4.State Tax Credits for Deconstruction: States could take the lead in providing tax credits for deconstructing residential and commercial structures. Not only would this provide motivation for waste diversion at a state level, but it could be an attractive incentive for businesses to come to and remain within a state—they could receive a credit for materials and/or property donated during a renovation or change of ownership within a corporate property. Working in tandem with local deconstruction ordinances, states like Wisconsin and Oregon could work to find a good balance between the mandated ordinance and a corresponding state tax credit for both residential and commercial taxpayers. States like Oregon with a marginal personal income tax rate topping out at 9.9% or Wisconsin with the highest marginal rate of 7.65% could be more business friendly and simultaneously environmentally conscious by enacting a deconstruction tax credit.
At The Green Mission Inc., we would like to provoke conversations and dialogue among clients, tax advisors, deconstruction firms, nonprofits, the IRS, local and state taxing authorities and any other key decision makers who can help promote waste diversion through policy changes. From the EPA, “Demolition represents more than 90% of total C&D debris generation, while construction represents less than 10%,” and “548 million tons of C&D debris were generated in the United States, in 2015—more than twice the amount of generated municipal solid waste.”1 Implementing smart taxing policy could provide the “carrots” our country and world need to create a sustainable future for many generations to come.
