OUR THOUGHTS ON:

Using a 179D Study to Increase Your Return on Investment

Construction

By Mark DiPietrantonio

In 2005, Congress passed the Energy Policy Act (EPAct) of 2005 that created the 179D Energy-Efficient Commercial Building Deduction.  The 179D deduction allows taxpayers to take a federal tax deduction of up to $1.80 per square foot for the installation of energy-efficient interior lighting, HVAC and building envelope systems.

Who Qualifies For The Deduction?

The deduction is available to building owners and lessees who make energy-efficient improvements to their commercial buildings located in the United States between 2006 and 2013.  Multi-family buildings over four stories are also eligible.

In addition, designers of government-owned buildings may also be assigned the 179D deduction from a government agency if they are the “primary designer” and the government agency allocates the deduction to them by signing a “municipal allocation letter.”  A few examples of the type of public projects that may qualify for the assignment of the 179D deduction include:

  • Schools, including state universities
  • Libraries
  • Airports
  • Government offices
  • Post offices
  • Court houses

What Type Of Energy Improvements Qualify For The Deduction?

Each of the three building subsystems mentioned above are eligible for the federal tax deduction.  However, the 179D deduction cannot exceed the building owner’s or lessee’s tax basis in the building.

A building is eligible for the entire $1.80 per square foot federal tax deduction if it saves at least 50% in energy and power costs for improvements in lighting, HVAC and building envelope, as compared to a building that meets the ASRAE 90.1-2001 standards.

How the 179D Deduction Works

To claim the 179D deduction, the property must be certified by an independent third party who is qualified to perform a study certifying that the energy standards have been met.

The deduction is generally available in the year that the property is “placed in service.”  If a property is certified in a year after the building is placed in service, a taxpayer may be required to amend prior tax returns to claim the deduction.  However, if the taxpayer owns or leases the commercial building (as opposed to being allocated the deduction from a government agency), the Internal Revenue Service allows taxpayers to file for a “change in accounting method” to claim the deduction in the year that accounting method is changed.  The advantage of utilizing the change in accounting method is that it allows taxpayers to avoid the costs and other issues associated with amending tax returns.

It is important to note that taxpayers who own or lease the commercial building must reduce their tax basis of the building for the amount of the 179D deduction. 

To illustrate the impact of the 179D deduction, assume that:

  1. A taxpayer makes qualifying improvements in 2011 to a 50,000-square-foot commercial building that he or she owns.   
  2. The 179D study is performed in 2013.
  3. Two of the three building subsystems qualify for the 179D deduction.
  4. The initial cost basis of the building was $15,000,000.

The net 179D deduction in 2013, and the impact on the building’s tax basis, would be calculated as:

Net 179D Deduction In 2013

   

179D Deduction (50,000 sq. ft. x 1.20)

 

         $60,000

Less: Depreciation Taken in 2011 and 2012 on $60,000

 

           (3,015)

Deduction Available In 2013

 

         $56,985

     

Impact On Tax Basis Of Building

   

Initial Basis

 

  $15,000,000

Less: 179D Deduction

 

         (60,000)

Tax Basis Of Building On January 1, 2013

 

  $14,940,000

(Note:  This example is for illustrative purposes only.  There are a number of factors to be considered in determining the net benefit of a 179D study to each taxpayer.)

Accelerating the net 179D deduction into 2013, as opposed to depreciating the deduction of the remaining depreciable life of the building, could make a significant impact to the project’s return on investment.

Future of the 179D Deduction

The 179D deduction expired on December 31, 2013.  Although no one can be certain about future tax legislation, there are lobbying efforts being pursued to extend the deduction in 2014.  For now, taxpayers should still consider the 179D deduction for property placed in service between 2006 and 2013.

© 2014 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2018 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

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