Building owners and tenants who construct new buildings or improve existing buildings often miss out on valuable tax deductions at the time the building or improvement was originally placed into service. Until recently these deductions were lost forever unless filed on a current-year return or through amending prior-year returns. Recent IRS guidance enables building owners and tenants to take the deductions this year for projects as far back as 2006—without amending tax returns.
These are known as Section 179D deductions, and they allow owners and tenants who have made energy-efficient improvements to claim valuable deductions by making an accounting method change. By way of example, a 100,000-square-foot office building could yield up to $180,000 in accelerated deductions for the building owner or the tenant that owns the improvements.
How does it work? Each of the three qualified building components—the HVAC system, the lighting, and the building envelope—make up one-third of the total deduction available, at $0.60 per square foot for each component. That means the deduction could be worth a total of $1.80 per square foot of qualified space. The building owner or tenant may qualify for the entire deduction or a portion of the deduction, based on the energy efficiency of each component.
The IRS guidelines have established the baseline for determining energy efficiency as outlined in Standard 90.1-2001 developed by the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America. Buildings constructed in 2006 through today most likely will qualify for a portion, if not the entire deduction, since building standards have progressed substantially over the past six years.
To qualify for any portion of the deduction, the building owner or tenant must have the improvements certified by a qualified individual who is licensed as a professional engineer or a licensed contractor within the jurisdiction in which the building is located. The qualified individual performs an energy study and provides the building owner or tenant with an energy efficiency certification, documenting the overall efficiency of the components installed.
The Department of Energy estimates that less than 1% of the qualified buildings in the United States have taken advantage of the deduction. The likely reason for such a low rate is that building owners are unaware they even qualify for an energy efficiency deduction without being LEED certified or using state-of-the-art “green” technology. In many instances they’re simply missing out on a deduction that could provide a much-needed tax break, especially with recent tax rate increases.
In addition to the energy deductions, there’s a 30% tax credit available for installing energy-generating property, including solar, fuel cell, and wind devices. In many cases the installation of credit-eligible energy-generating property coincides with the installation of energy-efficient building components related to the deduction.
All in all, for building owners and tenants who have constructed or made improvements to buildings over the past six years, it pays to explore the opportunity of Section 179D tax deductions now, in advance of their December 31, 2013, expiration.
Greg Martin is the national Real Estate & Hospitality Practice Leader at Moss Adams LLP, one of the largest accounting and consulting firms in the nation. He can be reached at (415) 677-8277 or firstname.lastname@example.org.
Jason Thompson is a senior manager at Moss Adams and leads the firm’s energy efficient building deduction practice and Washington State cost segregation practice. He can be reached at (425) 317-3051 or email@example.com.