Building owners who are interested in obtaining a significant cash tax benefit before the end of this year should move quickly to realize a deduction of up to $1.80 per square foot for energy-efficient building improvements. The deduction provided under Section 179D of the Internal Revenue Code is scheduled to expire for tax years beginning after December 31, 2013. While Congress may extend this popular provision, there can be no assurance that they will do so.
Congress had provided this significant tax benefit in an effort to encourage owners of commercial buildings to increase the energy efficiency of their properties, The deduction is based on the use of improvements to the building’s lighting, HVAC, or envelope. The IRS allows taxpayers to take the deduction for both current and previous projects by obtaining a change of accounting method for all open tax years.
How Does It Work?
The maximum deduction is composed of three partial deductions of $0.60/sq. ft. for each of lighting, HVAC, and building envelope (i.e., roof, walls, insulation, doors, windows, etc.) improvements. In order to qualify for the maximum deduction, the improvements must reduce the building’s total annual energy and power costs by at least 50 percent as compared to a reference building that meets the minimum requirements of Standard 90.1-2001 of the ASHRAE. If the 50 percent standard is not met, then lesser benefits may still be available.
Example: A one-million square foot multi-function manufacturing plant retrofits its existing fluorescent fixtures with LED fixtures that provide lower energy consumption, more powerful lighting, and do not contain hazardous mercury. The retrofit will probably qualify for the maximum $0.60/sq. ft. deduction because the manufacturing category ASHRAE standard tends to be easily met by LED fixtures. This would create a $600,000 tax deduction in the year the new lighting is placed in service, resulting in an immediate federal income tax benefit of $210,000.
Who Can Benefit?
Any type of commercial building potentially can qualify for the deduction. Warehouses and industrial buildings, parking garages, car dealerships, restaurants and hotels, office buildings, and retailers are among the types of properties that have received benefits. In addition, architects, engineers, and lighting designers can receive the tax benefits for improvements to government buildings such as courthouses, transportation facilities, schools and universities, town halls, and libraries.
How Can I Get the Deduction?
In order to obtain the Section 179D deduction, the energy-efficient commercial building property must be certified by a qualified professional engineer or contractor to meet the requirements of the law. Among other requirements, the certification must:
• be based on a field inspection of the building
• use qualified computer software to calculate energy and power consumption and costs;
• list the components of the energy efficient improvements and their projected annual energy costs; and
• be retained with the records for the tax return for the year in which the deduction is taken.
If the energy-efficient property was placed in service in a prior taxable year, it is necessary to file an amended tax return and request a change in method of accounting (Form 3115) with the IRS.
How Can True Partners Consulting Help?
The Accounting Methods Team at True Partners Consulting is your complete solution for scoping and executing Section 179D certification studies and preparing the associated tax filings. From a complimentary tax benefit assessment, to a comprehensive tax package that includes everything necessary to claim the deduction, to audit assistance, True Partners Consulting delivers everything you need. For more information, please contact:
Robert M. Gordon, Esq.