Between the costs associated with maintenance, utilities, and improvements, owning a commercial building is an expensive endeavor. Building owners face the constant dilemma of how to save money without compromising the comfort of tenants and customers. When considering financial strategies, building owners may discover a boon in the federal tax code.
The §179D deduction, which rewards energy efficiency measures in commercial buildings, has been one of the most powerful tax incentives available to building owners and primary designers since it was created under the Energy Policy Act (“EPAct”) of 2005. This popular deduction expired on December 31, 2016, and Congress is still considering options for its renewal. However, there is a limited amount of time remaining to claim §179D for past projects through the look-back period, so commercial building owners that have installed energy efficiencies should consult with a tax professional immediately. Section 179D offers a deduction of up to $1.80 per square foot when qualifying improvements are made to lighting systems, the building envelope, or HVAC systems.
In addition to §179D, the tax code equips commercial building owners with other tools to substantially reduce their tax burdens, including cost segregation and the tangible property regulations.
Cost segregation is an IRS-approved strategy that allows taxpayers to quickly boost cash flow by simply changing the classification of certain property assets. Typically, real property is depreciated over a 39-year period, while tangible personal property is depreciated over five, seven, or fifteen years. Therefore, personal property yields more substantial and immediate depreciation deductions for the owner.
A cost segregation study—which is usually performed by a third-party with engineering and tax expertise—subdivides a real property asset into items that may be considered tangible personal property. Examples of these items include certain types of electrical wiring, carpeting, and wall coverings. By reclassifying these items from real property to personal property, the building owner can take advantage of the shorter depreciation lives and claim accelerated depreciation deductions. This significantly lowers the building owner’s tax burden, thereby generating cash flow that may be used to repair, maintain, or improve the building.
Tangible Property Regulations
The tax code’s tangible property regulations went into effect on January 1, 2014. They apply to all taxpayers that have acquired, produced, or improved tangible property, such as buildings or equipment. The regulations allow taxpayers to expense items that were capitalized as improvements in previous years—enabling them to claim additional deductions and losses. Since commercial buildings are full of assets that sometimes require repair, replacement, or improvement, the tangible property regulations offer an effective way for building owners to reduce their tax burdens. In order to reap the benefits of the regulations, taxpayers should be ready to produce meticulous documentation of improvements, repairs, and dispositions of assets.
Are you looking for ways to cut the costs associated with owning a commercial building and improve your cash flow? With a unique combination of facility engineering and tax accounting expertise, the team at Capital Review Group can help you maximize tax savings through strategies like §179D, cost segregation, and application of the tangible property regulations. Contact CRG to schedule a pro bono analysis!