Posted by Robert Hancock on 10.31.24

Have any of your current clients constructed, purchased, expanded or remodeled real estate? If so, they may be eligible for ten, or even hundreds of thousands of dollars in tax savings through a cost segregation study. Tax Point Advisors works with CPA firms and business owners to coordinate cost segregation studies, to uncover potential tax savings and significantly increase cash flow through reclassification and depreciation of properties.

Cost segregation is a strategic tax planning tool that allows businesses and individuals who have constructed, purchased, expanded, or remodeled commercial real estate to accelerate depreciation deductions and defer income taxes, thus improving cash flow. A cost segregation study analyzes the property's construction or purchase costs, identifying building components that can be depreciated over shorter timeframes (5, 7, 10, or 15 years) rather than the standard 27.5 or 39 years. This provides crucial information, as it establishes the tax basis for all building components, including the roof, windows, HVAC, and tenant improvements. The original cost segregation analysis can be leveraged to claim a loss deduction when these components are eventually replaced.

In this study, a property is broken down into smaller components of a property such as:

• The building itself is only eligible for straight-line depreciation. Residential buildings are eligible for straight-line depreciation over 27.5 years. Commercial buildings are depreciated using a straight-line method over 39 years.

• Land improvements which include sidewalks, landscaping, parking lots, and sprinkler systems. Land improvements can be depreciated over 15 years.

• Personal property such as equipment, flooring, fixtures, window treatments, and computers, to name a few are eligible to be depreciated over five or seven years.

A cost segregation study can be used to identify related energy-efficiency building components that are considered part of the 39-year property and are eligible for other energy tax incentives such as Section 179D or 45L.

Eligibility requirements for the Section 179D deduction

Building owners and designers of government or non-profit owned buildings are generally eligible for this deduction ensuring that those who invest the most effort into improving a building's energy efficiency are rewarded.

BUILDING OWNERS - Commercial building owners who invest in constructing or renovating a property that meets energy efficiency requirements can claim the Section 179D tax deduction. To maximize the tax benefit, the building should be a large commercial property with high square footage. However, owners must not be in a tax-exempt situation to qualify for the deduction.

ARCHITECTS OR BUILDING DESIGNERS - For commercial buildings owned by tax-exempt organizations like nonprofits, hospitals, schools, and government agencies, the building owner often cannot claim the Section 179D energy efficiency tax deduction. In these cases, the building's designer may be able to claim the deduction instead.

To qualify for the Section 179D deduction, designers must meet several criteria. First, they must demonstrate that they are an architect, engineer, or other party responsible for designing energy-efficient building envelope, lighting, or HVAC enhancements. Additionally, designers need an allocation letter from the tax-exempt building owner, which authorizes the deduction to be passed on to the designer. Finally, designers must provide all relevant documentation detailing the energy-saving improvements and their associated costs.

Due to the complex calculations required to determine Section 179D compliance, designers and building owners must rely on a licensed third-party professional to complete and certify the Section 179D study. Tax Point Advisors can help you or your client assess eligibility and potential tax savings before pursuing these options.

Section 179D impacted by recent changes in tax legislation

Government-driven green building tax programs emerged in the early 2000s. This was spurred by the 2005 Energy Policy Act, as policymakers recognized the need to incentivize sustainable construction. While some green energy tax policies already existed, the 2022 Inflation Reduction Act cemented the government's commitment to making sustainable buildings more economically attractive for owners and designers.

The Inflation Reduction Act (IRA), which took effect on January 1, 2023, significantly expanded the benefits of flagship programs like the Section 179D tax deduction. These enhancements made these incentives more accessible. The programs had already played a key role in encouraging the adoption of energy-efficient building practices. Now, they offered an even more compelling proposition. Eligible projects stood to gain more participants, as the IRA allowed for higher monetary claims. This made sustainability a financially rewarding choice for potential candidates.

Section 179D allows eligible parties to claim enhanced tax deductions for implementing energy-efficient technologies and designs in commercial and tax-exempt buildings. This incentivizes the adoption of sustainable building practices, leading to immediate cost savings as well as long-term operational efficiency and reduced energy expenses.

Effective strategies to optimize the tax advantages offered by Section 179D Section 45L

The Section 179D energy-efficiency tax credit has many complexities that can complicate the filing process. Determining if your building is eligible, deciding whether to pass the deduction to a designer and navigating the proper procedures all require careful attention to detail. Tax Point Advisors can help you assess your eligibility and potential tax savings before pursuing this deduction.

The Section 45L tax credit rewards multifamily developers, investors, and homebuilders who construct energy-efficient homes and units sold or leased after December 31, 2005. Eligible properties include apartment buildings, condominiums, single-family home developments. The credit also applies to substantial reconstruction and rehabilitation projects. To qualify, a dwelling unit must meet certain energy efficiency criteria. Given current construction trends and local building codes, many developments are adopting energy-efficient measures that help them qualify for the Section 45L tax credit.

It's important to note that individual homeowners generally do not qualify for the Section 45L tax credit.

Residential developers, especially those focused on affordable housing, should consider leveraging Section 45L as part of their tax reduction strategy. The IRS requires an engineer-based report to support the acceleration of depreciation. Tax Point Advisors works with CPA firms and business owners to coordinate the cost segregation study, to uncover potential tax savings and significantly increase cash flow through reclassification and depreciation of property. The IRS requires an engineering based report to support the acceleration of depreciation. Tax Point Advisors offers in-house engineering capabilities and the tax expertise to help you quantify the amount of tax savings you could receive. We also will identify any obstacles preventing a property owner from fully realizing their tax-savings potential.

To speak to one of the experts at Tax Point Advisors, please call us at (800) 260-4138 or please leave us a message below.