News for the 179D Deduction in 2016
01/2016 – “Protecting Americans from Tax Hikes Act of 2015” (PATH Act) has been passed by the House and Senate which was signed into law on December 18, 2015. The bill expanded the Section 179 deduction limit to $500,000.
The Section 179 Deduction is finally permanent at the $500,000 level until further notice.
Key things to take into consideration:
Qualifying equipment has the Section 179 deduction phase-out dollar-for-dollar and completely eliminated above $2.5 million.
50% Bonus Depreciation will be extended through 2019.
Businesses will be able to depreciate 50 percent of the cost of equipment put into service during 2015, 2016 and 2017. Then bonus depreciation will phase down to 40 percent in 2018 and 30 percent in 2019.
Benefits of the 179D Tax Deduction
In order to claim the credit, the work must be performed on a qualifying building. How building is defined by the law is very broad, including all of the following types of structures:
● Any commercial building
● Multi-family residential buildings that are four or more stories tall
● Parking structures
● Government buildings
This means that most types of buildings should potentially qualify for the tax deduction if the improvements that are made to them or the new building systems themselves meet the energy efficiency requirements.
Partial and full qualification
There are three main building systems that can qualify for the deduction, with each being worth a partial qualification. The systems are the building’s envelope, the lighting system and the heating and cooling systems. These systems must meet the energy efficiency standards as outlined by the American Society of Heating, Refrigerating, and Air-Conditioning Engineers, or ASHRAE, in 2007. That standard is more stringent in the extended law, as the prior standard was to exceed the 2001 ASHRAE standards.
In order to be able to claim the $1.80 per square foot maximum deduction, the building must provide 50 percent or more in energy savings when compared with the base building outlined by ASHRAE. Building codes in almost every U.S. locality already meet or exceed those standards, meaning many projects are potentially eligible.
Qualifying taxpayers who can claim the credit may do so on a partial basis for renovations, designs or the new building of subsystems when the buildings themselves do not meet the 50 percent threshold as follows:
● Deduction of .60 cents per square foot for HVAC systems that provide 15 percent energy savings
● Deduction of .60 cents per square foot for building envelopes providing 10 percent energy savings
● Deduction of .60 cents per square foot for lighting systems providing 25 percent energy savings
Often, even if a building will not qualify for one or two of the three subsystems, the building will qualify for the third one. Even being able to claim only a partial deduction can give the taxpayer substantial tax savings for engaging in green building practices.
Allocation letters and independent certifications
Since government buildings are owned by the government itself, the people involved in designing green systems or building them are able to claim the deduction under 179D since the government is unable to claim it for itself. For architects, engineers and contractors involved with designing and building qualifying systems in government buildings, they must ask the government agency to provide them with a letter that allocates the tax break to them. In addition, the law requires that the energy efficient system is independently certified as exceeding the 2007 ASHRAE standards. Independent certification of the systems involves having a licensed engineer inspect them during a site visit as well as completing modeling. The computer modeling of the energy savings must be done using software approved by the Department of Energy. After the independent certifications and modeling are completed, the qualifying taxpayers must keep copies in their records in order to prove they were entitled to claim the benefits and that the amount claimed is supported.
Building owners or tenants who paid for and own the improvements are able to claim the deduction. Owners claim it in the current year in order to reduce their basis. They are allowed to make claims going back six years for qualifying buildings and improvements that were placed into service.
2. Architects, design contractors, and engineers
Parties involved in designing and building the improvements through government contracts are eligible to claim the deduction. These parties are also able to claim qualifying improvements or projects from the last three years by filing amended returns. They must secure the allocation letter as previously described from the government agency. The IRS requires that the provided letter contains very specific information. It is best for those involved in the building or designing of the systems to request the allocation letter as early as they possibly can. Otherwise, the government may allocate the tax deduction to another party who was involved in designing the improvement. In most cases, the government agencies are willing to provide the allocation letters without too much trouble. The government understands the importance of encouraging green building practices.