Imran Syed, PE, LEED AP, Manager, Cost Segregation & EPAct §179D

Imran Syed, PE, LEED AP, Manager, Cost Segregation & EPAct §179D

Overview

On Friday, December 18, 2015, President Obama signed in to law the Protecting Americans from Tax Hikes (“PATH”) Act of 2015, Public Law No. 114-113. The PATH Act retroactively extended the §179D Energy Efficient Commercial Buildings deduction through the end of 2016. The PATH Act also modified the §179D deduction beginning in 2016. Popularly known as the EPAct §179D deduction, this deduction helps commercial building owners and designers of government-owned properties to build energy-efficient properties.

This deduction applies to building owners who have installed or retrofitted a property with energy-efficient lighting, HVAC and building envelope systems. The designers of government-owned buildings such as public schools, universities, federal and state offices, public libraries and government dormitories (four stories or higher) may also receive the deduction.

To receive the EPAct §179D deduction of up to $1.80 per square foot, a taxpayer must install building systems that reduce the building’s annual energy and power costs by 50 percent or more compared to the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (“ASHRAE”) standard baseline building. US Department of Energy-approved software uses simulations to calculate the reduction in energy and power costs. If a building does not qualify for the full deduction, there are partial deductions available for meeting energy reduction targets for the Lighting system, the HVAC and Service Hot Water system, and the Building Envelope system. The partial deduction is $0.60 per square foot. The energy savings targets are 25 percent for Lighting, 15 percent for HVAC, and 10 percent for the Building Envelope. There is also an Interim Lighting Rule that allows a building to qualify for a partial deduction if the interior lighting power density (watts per square foot of the interior lighting) can be reduced by at least 25 percent when compared to ASHRAE 90.1-2001. The deduction varies from $0.30/square foot to $0.60/square foot as the reduction increases from 25 percent to 40 percent. In addition to the reduction in lighting power density, the building must have certain automatic controls and bi-level switching.

Section 179D changes in 2016

Since the EPAct §179D deduction was first introduced, Congress required the energy modeling software to use the ASHRAE 90.1-2001 as the baseline standard. This standard will continue to apply for buildings placed in service in 2015, but buildings placed in service in 2016 will use an updated standard. The updated standard for 2016 is the ASHRAE 90.1-2007.

The major impact of the updated 90.1-2007 ASHRAE standards will be to the Interim Lighting Rule. The 90.1-2007 standard for interior lighting power density is more stringent than the 90.1-2001 standard. For example, under the old standard, a university was allowed a Lighting Power Density of 1.5 watts per square foot. Under the new standard, the allowed Lighting Power Density will be 1.2 watts per square foot.  Another area of impact will be for non-residential buildings of five floors or less that are more than 25,000 square feet and less than 75,000 square feet. The ASHRAE 90.1-2007 baseline HVAC system type for this type of building is different and more efficient compared to the previous standard.

If you have questions about how these changes affect you or your clients, please contact us. SourceHOV|Tax has performed numerous §179D studies across the United States using its streamlined process to certify buildings and increase tax deductions.

Permanent increase in expensing limits under §179 creates big benefits for small businesses.

Recent passage of the Protecting Americans Against Tax Hikes (PATH) Act of 2015 makes permanent or extends several provisions.  This is particularly noteworthy for small businesses that often rely on the cash flow these incentives create to invest in additional staff or equipment.

A permanent extension of the §179 Expensing Rules extends the small business expensing limitation and phase-out amounts in effect from 2010 through 2014 to $500,000 and $2 million, respectively.  This is a significant increase from the current amounts of $25,000 and $200,000 and another win for small businesses.  The provision also modifies the expensing limitation by indexing both the $500,000 and $2 million limits for inflation beginning in 2016.

Also permanently extended are the special rules that allow expensing for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.  The provision modifies the expensing limitation with respect to qualified real property by eliminating the $250,000 cap beginning in 2016.

In addition, heating and air condition units placed in service in tax years beginning after 2015 can now be expensed.

15-year straight-line cost recovery for qualified leasehold improvements, restaurant buildings and improvements, and retail improvements are now permanent benefits.

Retailers, restaurant operators and businesses with increasing leasehold needs can now count on the 15-year recovery period, provided they meet the established criteria for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.

Bonus depreciation is extended with sunset.

Bonus depreciation has been a lucrative incentive since 2001.  The PATH Act extends 50 percent bonus depreciation for 2015, 2016 and 2017.  It reduces to 40 percent for 2018 and 30 percent in 2019.

Interestingly, the provision modifies bonus depreciation to permit certain trees, vines and plants bearing fruit or nuts to be eligible for bonus depreciation when planted or grafted rather than when placed in service.

  • 179D energy-efficient property extended.

Also extended is the §179D green building deduction for the construction of commercial properties that meet certain ASHRAE standards for energy-efficient installation of lighting, HVAC and building envelope.  This deduction can be taken by building owners, or in the case of public buildings such as schools, hospitals or other government-owned properties, it can be taken by the primary designer.

Provisions Offer Additional Tax Benefits

In late July the Senate Finance Committee approved a modified and expanded version of the tax extenders bill that would provide a two-year retroactive extension of more than 50 expired business and individual tax provisions. Most noteworthy are enhancements to the research and development tax credit; §179 expensing provision; and the §179D deduction for sustainable design and construction of commercial properties.

R&D tax credit expansion would benefit small and medium sized businesses

The proposed R&D tax credit extension includes an AMT patch, which would allow companies paying AMT with less than $50 million in average sales over the prior three years to claim the credit. Start ups, defined as companies with less than $5 million in gross receipts and less than five years old, would be able to use the credit to offset up to $250,000 in payroll taxes annually.

Fixed asset benefits from enhancements to bill

The proposed bill would index the increased §179 expensing and phase-out limits ($500,000 and $2 million, respectively) to inflation. This is in addition to the extension of bonus depreciation and 15-year recovery for qualified properties.

Energy-efficient commercial building deduction expanded

The §179D commercial green building deduction would be expanded to allow nonprofits and tribal organizations to allocate the deduction to the primary designer of the property, a provision currently in place for government or other public entities.

If passed, all of the extenders would be set to expire on December 31, 2016. The modifications proposed for the extenders listed here could potentially provide significantly higher benefits for many small to medium sized businesses. The bill now has to make its way to the full Senate, although congressional debate will likely delay enactment until year-end.

If you enjoyed this post, click here to receive email updates.

Chris Henderson, VP of Operations

Chris Henderson, VP of Operations

In January 2011, the IRS issued Revenue Procedure 2011-14 that provided an alternative accounting method for claiming the EPAct 179D tax deduction for sustainable design. Rather than amending tax returns, architectural firms that had not previously taken the deduction were allowed to claim the deduction on their current year’s return using a Form 3115 along with a certification report and an allocation letter.

However, this week, IRS author of 179D guidance, Jennifer Bernardini provided clarification with regard to Form 3115. While admitting that ambiguity exists in Rev Proc 2011-14, she stated the Office of Chief Counsel, the IRS division that reviews accounting methods, was unlikely to grant any accounting method change submitted by architects that have not previously claimed the 179D deduction. She also indicated the IRS is working on guidance that would clarify the ambiguity found in Rev Proc 2011-14 but gave no timetable.

While Ms. Bernardini’s comments represent her own opinion and not those of the IRS, her comments can be interpreted as the prevailing thought at the Service. As such, SourceCorp recommends filing amended returns to claim 179D deductions associated with projects completed in prior tax years. To ensure that all 2008 projects are reviewed while still under statute, firms should gather complete blueprints and specifications as well as applicable allocation letters as quickly as possible.

SourceCorp is keeping close tabs on this issue and will communicate further updates.

The U.S. Green Building Council – Central Ohio Chapter and the Construction Specifications Institute Columbus Chapter announce the first annual joint trade show and educational event to be held April 18, 2011 at COSI Columbus.

DesignColumbus2011 is an opportunity to learn about and engage in the transformation of the Central Ohio built environment to be more healthy, prosperous, and sustainable. With 16 educational seminars and a two-floor trade show, the event will highlight current and future development of technologies for all leaders in Central Ohio responsible for creating building and communities that promote economic growth and sustain the health and vitality of all life. SourceCorp’s Bob McPherson and Jeanne Briggs will lead an educational seminar on the EPAct 179D tax deduction.

This full day of continuing education and informational displays is organized to attract hundreds of professionals involved in the building industry. Attendees and participants are representatives of the entire project team, including architects, designers, engineers, owners, developers, government officials, municipal planners, facility managers, contractors, construction managers, construction specifiers, manufacturers, product representatives, and others.

For all attendees, the continuing education component includes opportunities for AIA and GBCI/ USGBC continuing education units (CEUs). These CEU opportunities are of tremendous value to AIA and LEED Accredited Professionals interested in maintaining their credentials in an ever more competitive marketplace.

WHERE: COSI, Center of Science and Industry 333 West Broad Street Columbus, OH 43215
WHEN: Monday, April 18, 2011 from 10:30 AM – 6:00 PM (ET)
INDUSTRY: Building Design and Construction

REGISTRATION:
Attendees: http://designcolumbus2011.eventbrite.com
Sponsors: http://designcolumbus2011sponsorship.eventbrite.com

Chris Henderson, VP of Operations

Chris Henderson, VP of Operations

Architectural firms in charge of the design of public schools, government and municipal buildings are eligible to claim the EPAct §179D tax deduction for sustainable design. This deduction was part of the Energy Policy Act of 2005 and was intended as an incentive for architects to incorporate energy-efficient building components in their designs. Until recently, firms were limited by a three-year rolling statute to claim the deduction on amended tax returns.

However, in January 2011, the IRS issued Revenue Procedure 2011-14 that provided an alternative accounting method. Rather than amending tax returns, architectural firms that have not previously taken the deduction may go back as far as 2006 and claim the deduction on their current year’s return using a Form 3115. A certification report and allocation letter must be filed with the Form 3115.

In most cases, claiming the §179D deduction on a Form 3115 is the preferred method. However, if a firm has already claimed the deduction on amended returns, their accounting method is established and should remain the same. For more information on the EPAct §179D tax deduction, please contact me at chris.henderson@sourcecorptax.com.

Jennifer Chin, National Director of EPAct 179D

Architectural firms that design schools, government and municipal properties may qualify for the EPAct §179D tax deduction. This change came about in 2008 and is meant to incentivize a struggling construction industry to design and build sustainable properties.

Because government entities are tax exempt, they cannot use the §179D deduction. However, they can assign the deduction to an architectural firm by signing an allocation letter acknowledging the firm as the primary designer. On occasion, a firm will meet with a certain amount of resistance when requesting a signature.

To help alleviate this issue, it is important for the government entity to understand how the deduction works for the architectural firm. For example:

If a $100,000 deduction is confirmed, at a 35% tax rate it will equate to a $35,000 reduction in tax or refund of previous taxes paid. If you assume $12,000 in fees for third-party certification, the net benefit to the architectural firm is $23,000.

The §179D deduction is used to offset taxes owed or previously paid. There is no way to truly share this deduction with a government entity. On occasion, we see firms offer to make a charitable contribution to the government entity or reduce their fee on a future project, but this is not necessary.

It is important the government entity is not viewed as requesting a kick-back for an incentive that was intended for architects. It is not up to the government entity to grant permission for an architectural firm to use this deduction but only to acknowledge them as the primary designer.

For more information on the EPAct §179D tax deduction and how it applies to architectural firms, watch our YouTube video. You can also visit us at sourcecorptax.com. SourceCorp is a national tax specialty firm that provides independent certification for EPAct §179D qualified properties.

Chris Henderson, VP Operations

I’m passing this along from our friends at the National Electrical Manufacturers Association (NEMA).  We’ve seen this proposal before, but it would be  tremendously beneficial  for designers of government owned green buildings if this legislation becomes law.

Yesterday, Senators Bingaman (D-NM) and Snowe (R-ME) introduced S. 3935, the Advanced Energy Tax Incentives Act.   This contains a number of incentives that have been advocated during the past two years, including Section 102 which increases the deduction from $1.80 to $3.00 (partial deduction increased to $1.00 per square foot per system) and modifies Section 179(D) to facilitate the ability of REITs (real estate investment trusts) to claim the deduction.

A summary of its provisions is available online at http://bingaman.senate.gov/policy/aetia_summ.pdf.

Here are the statements made yesterday:  “We must continue to ensure that the Tax Code contains well-designed incentives that will help us transition to an energy efficient economy,” explained Senator Bingaman.  “Our bill will significantly expand domestic clean energy manufacturing; help American businesses and families reduce their energy use and dependence on fossil fuels; and create thousands of jobs.  This is a common-sense, bipartisan proposal that deserves priority consideration.”

“For far too long our country’s energy strategy has prioritized the technologies of the past while our policy debate has languished in partisanship.  The world is moving ahead with bold action on innovative technologies and it is past time that we set a new course for how we use and think about energy,” said Senator Snowe.   “Energy efficiency has emerged as one of the most effective and expeditious initiatives that can be taken to preserve valuable resources for producers and consumers and I believe we can build upon the success of past tax credits with these critical energy efficiency tax incentives, which will spark innovation in our building and industrial sector and afford our constituents and businesses financial incentives to simultaneously reduce their energy bills and invest in our economy.  I appreciate working with Senator Bingaman on this comprehensive energy tax package and look forward to enacting these provisions into law.”

The 111th Congress is now in recess until November 15 when they will return for a week prior to Thanksgiving, and then Congress will return for a week in early December.    Whether energy tax legislation will be taken up remains to be determined.

Jennifer Chin, National Director of EPAct 179D

Many architects are not aware that their sustainable building designs for schools, government or municipal projects may qualify for the EPAct §179D tax deduction. §179D provides a tax deduction of up to $1.80 per square foot for designs that reduce the total energy and power costs by 50 percent or more when compared to an ASHRAE 90.1-2001 reference building. Partial deductions are also available.

A firm has the ability to go back three tax years to claim the EPAct §179D deduction for newly constructed or renovated properties substantially completed between 2007 and 2013.

For example, if a building was completed in 2007, you currently have the opportunity to amend that year’s tax return, potentially generating a refund from the IRS. However, the window for 2007 is closing. If you filed your 2007 return on March 15th, 2008, you have until March 15th, 2011 (three year statute) to amend that year’s return. Once the statute closes, that year’s tax return cannot be opened for purposes of taking this deduction.

Now is the time to begin evaluating your 2007 projects to understand if they qualify for the EPAct §179D tax deduction. Keep in mind that your firm will need time to select projects and have a third-party firm evaluate and certify them for the deduction. Also, your tax provider will need to prepare and file the tax return before the statute closes. Don’t leave money on the table — time is of the essence in claiming this deduction for 2007 properties!