Energy Efficient Commercial Building Property Deduction – IRC Section 179D
Most likely you are aware of Section 179 that allows businesses to expense certain capital purchase made during the year. But did you know that Section 179D allows a business to write off a portion of the cost of certain energy efficient commercial building property placed in service during the year instead of having to depreciate the entire cost over 39 years? The maximum deduction is $1.80/square footage of the building. The deduction is for property placed in service before 2014.
What property qualifies?
The definition of energy efficient property is:
1. Property installed on or in a building located in the United States
2. Property installed as part of the interior lighting systems, the heating, cooling, ventilation, and hot water systems, or the building envelope, and
3. Reduces the total annual energy usage(interior lighting, heating, cooling, ventilation and hot water systems) by 50% or more as certified by a qualifying individual*. A reference building is used to find a comparison to determine if the project reduces energy usage in the building by 50%.
*The certification must include certain information to ensure the deduction claimed on the tax return in valid.
What is the benefit?
In general, property installed as part of a commercial building and its structure is depreciated over 39 years. However, under Section 179D, a portion of the cost can be expensed in the current year.
Below is an example of how the deduction would look:
Assume a business builds a new 50,000 square foot building that costs a total of $1,000,000. The new building includes property that has been certified to reduce the energy usage by over 50% when compared to a similar building. Under normal depreciation rules, the building would be depreciated over 39 years, resulting in an annual deduction of around $25,641.
However, under Section 179D, the business would be allowed to immediately expense $1.80/square foot, or $1.80 X 50,000 = $90,000. The write off would reduce the basis of the property, allowing a depreciation in the current year of ($1,000,000 – $90,000/39 years = $23,333). The maximum deduction for the building in the current year increases to the sum of $90,000 and $23,333, or $113,333.
It is important to note that the 179D deduction does not count against the annual Section 179 deduction limitation. Also, for contractors that work on the government entities, the IRS has stated that they will allow the business that is primarily responsible for designing the property to take a portion of the deduction under Section 179D if energy efficient commercial building property is installed on or in property owned by a federal, state or local government.
If you have questions about the Section 179D deduction or want to discuss it further, please do not hesitate to contact our office at (952) 979-3100.
No Comments
Comments are moderated, and will not appear until the author has approved them.