In 2005, Congress created the Section 179D Energy Efficient Commercial Building Deduction. Taxpayers who placed in service building components exceeding certain efficiency standards between 2006 and 2013 were eligible for a $0.60 to $1.80 per square foot tax deduction. If an eligible taxpayer did not take advantage of the 179D deduction in the year they qualified, IRS revenue procedures allow the taxpayer to make an adjustment for it on their current tax return.
Qualifying lighting, HVAC, and building envelope property must be certified to be in compliance before a deduction may be taken. The basis of the qualifying property must be reduced by the amount of the 179D tax deduction, and the deduction cannot exceed the basis of the property.
If a property is certified in a year after it has been placed in service and depreciated, the taxpayer may file a Form 3115 – Change in Accounting Method to catch up the deductions that were missed. The adjustment will be the difference between the 179D tax deduction and the depreciation taken on that amount in previous years.
Ex; a new 30,000 square foot building with the basis of $5,000,000.00 was placed in service in 2010,in 2013, the taxpayer realized that the lighting and HVAC systems qualified for the 179D deduction ($0.60 per square foot each) the lighting and HVAC system were examined and certified by a qualified company, resulting in a deductible amount of $36,000 (30,000 sf X $1.20). Since the depreciable basis of the building must be reduced by the $36,000.00, the 2013 adjustment would be calculated as follows: 179D Deduction of $36,000.00 less depreciation is taken on $36,000.00 for 2010-2012 of $2,500.00 equals the adjustment on the 3115 of $33,500.00. Starting in 2013, the building’s depreciable basis will be $4,964,000.00 ($5,000,000.00 – $36,000.00), and they will report an “Other deduction” on their return of $33,500.00 as a “Section 481 adjustment for Section 179D tax deductions”.
Taking a $33,500.00 deduction now, rather than over the next 36 years could create 2013 tax savings exceeding $14,000.00 and net present value savings over time, depending on the use of that $14,000.00. Larger properties would receive the proportionately greater benefit, based on the qualifying square footage.