Building owners can allocate this deduction when they don’t need it themselves
With the emphasis on green construction and technologies, more owners and investors are considering adding energy-efficient components into new construction, as well as retrofitting existing buildings with energy-efficient improvements. A big incentive is the potential tax benefit under Internal Revenue Code Section 179D. But in cases where the owner cannot take the deduction, its benefits might go unrealized.
Owners who can’t use it, can allocate it
The deduction is available to the building owner, or it can be taken by the developer, the architect or contractor, if it is allocated to them, in instances where the building owner does not need the deduction.
For example, when a not-for-profit like a hospital makes green renovations to a building it owns, it cannot apply the deduction because it is tax-exempt. But it could instead assign the deduction to the developer, the architect or contractor involved. Or perhaps a developer is working with an investor fund as the building owner. The fund could potentially sign-over the 179D deduction if the investors cannot take all the losses on a current basis because they are passive.
You can take advantage of this break before its Dec. 31, 2013 expiration date. Or for improvements made in 2012, consider the break when filing or amending your 2012 tax return.
Here’s how 179D works
Building owners, or those they allocate to, can take an immediate additional tax deduction of up to $1.80 per square foot for certain energy-efficient improvements. The deduction is in addition to your normal treatment of the expenditure. The deduction is available for energy-efficient commercial building property put in service through 2013 and installed as part of the interior lighting systems; the heating, cooling, ventilation and hot water systems; or the building envelope.
To be able to utilize the full deduction of $1.80 per square foot, the components must reduce the building’s total annual energy and power costs by 50% or more compared with a reference building. But there is also a partial deduction if the 50% threshold isn’t met.
The partial deduction is $0.60 per square foot for each qualifying component, and again certain minimum energy savings percentages must be satisfied. For interior lighting systems the threshold is 25% and HVAC systems it is 15% for current year property placed in service.
The total deduction cannot exceed the excess of the $1.80 or $0.60 x the square footage of the building, for the current and for all prior tax years. For example, a building’s square footage is 120,000 square feet and in previous years we’ve taken $100,000 in Sec. 179D deductions for that building, The 2013 Sec 179D available deductions for the building can’t exceed $116,000 [($1.80 x 120,000) – $100,000). The deduction is measured building by building.
Don’t overlook routine upgrades
Lighting changes could reap a bit of reward. Because some lighting is required to be replaced by regulation, and incentives are offered by power companies, many owners have in fact already made upgrades that qualify. Be sure to take these into account when filing your returns.
Each improvement will need certifications including an explanation to the building owner regarding the energy efficiency features of the building and its projected annual energy costs. This certificate is not required to be attached to any tax return, just to be maintained for books and records.
Understanding the language
The term “energy efficient commercial building property” is defined as property with respect to which depreciation is allowable, installed on or in any building which is located in the United States and falls within the scope of Standard 90.1-2001. A building within this scope of this standard is a structure that is (1) Is wholly or partially enclosed within exterior walls, or within exterior and party walls, and a roof, affording shelter to persons, animals, or property; and (2) Is not a single-family house, a multi-family structure of three stories or fewer above grade, a manufactured house (mobile home), or a manufactured house (modular).
The Section 179D deduction was already extended beyond its original deadline and could be extended again. Clark Schaefer Hackett can help you stay on top of any additional extension and other tax incentives (such as those for solar energy) that could help you improve your bottom line with energy-efficient construction.