Energy Policy Act tax deductions ARE relevant to you or your clients. One way or another, the valuable deductions available under this statute, also known as the 179D Tax Deduction, will affect your firm or a client of yours.
A California Architect claimed over $1,000,000 in tax deductions over a multi-year period, using this technique to wipe out a tremendous amount of taxable income for the firm, on approximately 16 projects.
Adelanto District Office Building
27,700 Square Feet
Many of my clients that recently captured the tax deductions available under the Energy Policy Act either were not aware of this tax strategy or did not think it was applicable to their firm. Most of the time, that misconception involves a misunderstanding of the simplicity of the process in capturing the deduction or poor advice about the usefulness of the deduction. Despite the case studies, I often hear the same objections:
-If it was for me, my CPA would have taken care of this
-It won’t work for us because . . .
-I don’t have any income right now. How can more expenses benefit me?
-We can’t benefit from this because we’re an S-Corp.
Westcreek/Sycamore Elementary School
53,721 Square Feet
If you have tax years where there is already a net operating loss, taking advantage of the deduction anyway means you are able to book the expense before it expires and before this statute is no longer available as a tax strategy.
Oak Hills High School
258,346 Square Feet
If you are a pass-through entity, this deduction can still yield a tremendous tax savings compared to simply ignoring it altogether. The cost of conducting a study and generating the report that supports your deduction is typically a small fraction of the size of the available tax deduction.
To read more about how 179D Tax Deductions work, be sure to read the articles about the Energy Policy Act published earlier.
“Over the past 3 years, ETS has performed Energy Tax Certification for over a dozen of our firm’s projects. As a result, we have been able to generate over a million dollars in tax deductions for the firm. The staff at ETS has been knowledgeable and helpful, taking the time to explain and guide us through the process. I would highly recommend them for 179D certification needs. We will use them again on our next study.”
Gino Bastianon, AIA, LEED AP
Frick, Frick & Jetté Architects
19153 Town Center Drive
Suite 101
Apple Valley, CA 92308
——————————————————————————————————–
Here are some additional case studies.
$125,499.00 Energy Tax Deduction – High School in Illinois
Engineered Tax Services has proven to be technically proficient as well as administratively thorough. Their knowledge of tax regulation as it relates to IRS Section 179D deductions is noteworthy. The ETS technical staff worked in an exemplary fashion to find every allowable deduction thereby enabling our firm to receive a heretofore unexpected tax refund. I plan on using their services again in 2011 and for years to come.
Mr. Thomas G. Baker
President
Hurst-Roche Engineers, Inc.
Hillsboro, Illinois
——————————————————————————————————–
Nearly $300,000 Colorado Architect’s Trio of Energy Efficient Buildings
Colorado State University – Student Housing – 66,392 Square Feet
Northside Aztlan Community Center in Colorado – 48,741 Square Feet
Colorado State University – Indoor Practice Facility – 66,267 Square Feet
“Thank you for preparing our EPAct certifications for the Aztlan Center, the Indoor Practice Facility and Aspen Hall. I was very pleased with the thoroughness and quality presentation of the final product. In addition, I found the staff at Engineered Tax Services to be professional, patient and responsive during the entire process that was foreign to us. We felt strongly that we, as professionals, can have a large influence in the environmental impact of the facilities we design.
We greatly appreciate your help in achieving these goals and have already begun to see the rewards of your efforts.”
Michael L. Aller, AIA, LEED AP
Aller Lingle Massey Architects
Ft. Collins, Colorado
Are you missing the low-hanging fruit? One-third of the tax deduction under 179D is available for lighting and is potentially the easiest to obtain. But making mistakes in how you light (or re-light) your building can be costly. Here’s your cheat sheet (share it).
Tax deductions available under the Energy Policy Act of 2005, also known as Section 179D or Energy Efficient Commercial Buildings deductions provide up to $1.80 per square foot when a building meets certain energy efficiency criteria. The lighting component of that deduction generates a tax deduction of up to $.60 per square foot, which can be a substantial tax deduction in year one for a cost that you would normally need to amortize.
But to make sure you get the most out of the lighting deduction, there are a few things you should know. First of all, getting your lighting to qualify for the 179D deduction can happen 1 of 2 ways. The first is by modeling the lighting in the entire building to see if it reduces overall energy consumption by 16.67 percent. Second, you can use the Interim Lighting Rules if you can’t meet the building model requirement. Each approach has it’s challenges.
Qualifying Under the Model:
Many lighting studies fail under the building model and pass under the Interim Lighting Rules. To understand why, it’s important to realize that lighting typically makes up a smaller portion of a building’s overall energy consumption when compared to HVAC and other mechanical equipment in the building. When evaluating all three of the systems that qualify a building for 179D deductions (in an attempt to gain the full $1.80 deduction by a 50% reduction), the lighting component need not have as much impact on the model because the HVAC and building envelope factors can make up the difference.
But when evaluating lighting by itself (parking garages, warehouses, lighting retrofits), it can be a challenge to show that the lighting alone reduces overall building energy consumption by 16.67% if the lighting only makes up a small component of a building’s energy usage in the first place.
As an analogy, if you had a major flood occurring because of three water leaks (energy consumption), and one of those leaks (lighting) was only leaking a small amount, fixing that leak would only have a small impact on the flood. Lighting is like that. If it’s only a small part of the (energy consumption) problem, you can only expect improvements to lighting (no matter how great), to impact the overall problem, so much.
Section 179D doesn’t really care about that inequity. It still holds the lighting to that 16.67% improvement standard. And if you can’t demonstrate that, you don’t qualify for the $.60 / SF deduction. Your fallback is the Interim Lighting Rules. Go to next page to read about the Interim Lighting Rules.
Did you get your bonus this year? If you or your business placed new property in service in 2010 or 2011, there’s a huge bonus waiting for you on short life property. The Small Business Jobs Act signed on September 27, 2010 provides a 50 percent bonus deduction on most shorter-life property placed in service from 2008 to 2010. For property placed in service between September 9, 2010 and December 31, 2011, it can be 100%.
What is “bonus depreciation”? Bonus depreciation is an allowance by the IRS to take accelerated depreciation of expenses, even more quickly than would normally be the case.
Under normal circumstances, taxpayers can accelerate the deduction of the cost of buildings they purchase or build by using cost segregation in compliance with the modified accelerated cost recovery system (MACRS) established by the IRS and described in the IRS Audit Techniques manual. In other words, by following the IRS rules regarding what is long life property and short life property, you are allowed to classify a good percentage of your building as “short life” property and write off the cost of it sooner, rather than later. Typically, you’ll accelerate expenses from 25 or 39 year “life” to 5 or 15 year life.
Bonus depreciation allows taxpayers to not only deduct qualifying property over a shorter period (5 or 15 years) but to actually take a percentage of that shorter life property in YEAR ONE. To qualify, the property placed in service must be classified as having a class life of 20 years or less (typically 5 or 15 year property). Once qualified, a certain percentage of that short life property can be written off in year one. The remaining basis for the shorter-life property will then be depreciated over the applicable MACRS recovery period.
Bonus depreciation has been around for nearly a decade but has only recently hit 100% for the 2011 period and part of 2010.
Here is a cheat sheet for ease of description for each applicable period:
| Placed In Service Dates | Bonus Depreciation? | Bonus Percentage |
| 09/10/01 – 05/05/03 | 30% | 30% |
| 05/06/03 – 12/31/04 | Yes | 50% |
| 01/01/05 – 12/31/07 | No | N/A |
| 01/01/08 – 12/31/09 | Yes | 50% |
| 01/01/10 – 09/08/10 | Yes | 50% |
| 09/09/10 – 12/31/11 | Yes | 100% |
| 01/01/12 – 12/31/12 | Yes | 50% |
Do YOU Qualify?
If you’re looking to take bonus depreciation in the first year as noted above, be sure to consider whether you meet the necessary criteria:
- The original use of the property starts with the taxpayer after December 31, 2007 and before January 1, 2009 but only if no written, binding contract for the acquisition of the property was in effect before December 31, 2007.
- Qualifying property has a recovery period of 20 years or less under the MACRS
- The property cannot be property which is required to be depreciated under §168’s alternative depreciation system.
The requirement begs the question, “How do I take my 39-year building asset and convert some of it to ‘less than 20-year’ property in order to meet these requirements?” Quite simply, the most effective way of properly segregating the asset into it’s respective class lives (5-year, 15-year, 39-year) is through an engineering-based cost segregation study. Once you’ve moved a percentage of property to those shorter lives, you can take up to 100% of the cost of that qualifying property as a first year expense, creating a substantial tax savings.
——————–
TIP: When choosing a cost segregation provider, be sure to ask a few questions to make sure you’re getting the type of analysis you need to protect yourself from a costly IRS audit. Your CPA will want to rely on a study that is not only reasonable but provides “substantial authority” that they can rely on to avoid costly penalties.
Many companies that provide cost segregation services are only marketing companies or use only an appraisal or residual-based cost segregation. These approaches can raise red flags and audits that may be costly or indefensible.
Ask your cost segregation provider (or have your CPA ask) a few questions to be safe:
-Are you a licensed engineering firm? If so, may I see your license?
-Is a licensed engineer signing off on my study?
-Is the person signing off on my study covered by your insurance policy?
-Is my study insured for an amount sufficient to cover me if my study is disallowed?
-Will you provide 100% audit support to me at no charge to defend my study before the IRS?
-Have you defended your studies before the IRS and if so, with what success rate?
