Every business owner searches for ways to reduce their income tax liability.
Through effective tax planning, there are several strategies companies can employ to reduce taxes owed, including business tax credits, incentives, and deductions. For many, this is where the opportunity ends, but for commercial real estate and other industry companies, there are additional tools that can drive significant savings. Cost segregation studies, partial asset dispositions, 1033 exchanges, and 1031 like-kind exchanges are useful tax saving tools. Beyond these, property owners, tenants and building developers can realize additional savings by making energy-efficient building improvements and taking the Section 179D deduction. To help clients, prospects and others understand the deduction and how it can benefit them, Hanson & Co. has provided a summary of key details below.
What is the Section 179D deduction?
This deduction was originally created as part of the Energy Policy Act of 2005 to encourage commercial property owners to reduce energy waste and implement more efficient building systems. The tax deduction allows property owners and qualifying businesses the opportunity to claim a $1.80 tax deduction per square foot for energy-efficient enhancements that meet or exceed a 50% energy cost reduction (when compared to the 2007 American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE) base building standard). There are lesser benefits for enhancements made that achieve an energy cost reduction below 50%.
How to Qualify
The deduction is available to building owners and lessees who make eligible improvements to a commercial building. These buildings can include retail complexes, industrial buildings, warehouses, office buildings and even apartments, but they must be taller than four stories. Regulations stipulate that qualifying improvements be made to the heating, ventilation and air condition (HVAC) system, lighting system or to the building envelope. This can include high-efficiency insulation, energy-efficient lighting fixtures and systems, automatic thermostats and lighting controls, ultra-efficient cooling systems and furnaces, enhanced fan efficiency and daylighting enhancements.
What is the Benefit Amount?
As mentioned above, there is a $1.80 tax deduction per square foot for enhancements that result in a 50% or greater energy cost reduction. A deduction of $.60 per square foot is available for enhancements that result in a lower cost reduction. Specifically, a taxpayer can receive the reduced deduction if they create a 15% energy cost reduction in HVAC, 25% energy savings for lighting systems or a 10% savings in the building envelope. These benefits are available on commercial or other buildings constructed in 2006 or later where appropriate efficiencies have been achieved.
The Section 179D deduction is a robust tax savings opportunity for real estate owners and qualifying tenants. If you are interested in learning how to qualify or need assistance reviewing past upgrades or planning future ones, Hanson & Co. can help. We work with dozens of companies to identify ways to leverage this and other tax-saving opportunities. For additional information please call us at (303) 388-1010, or click here to contact us. We look forward to speaking with you soon.