By Carol Hayward and John Cummings, Engineered Tax Services
Welcome to the Energy Policy Act of 2005 (EPAct), aka Section 179D, which is a government method to encourage U.S. building owners, lease holders, and designers of government buildings to be more efficient for commercial buildings or residential properties with four or more stories.
If you or your clients built new construction or made energy improvements to a commercial building in the last few years, but didn’t take federal tax deductions allowed under Section 179D of the Energy Policy Act of 2005, this may be a lucky year. A new IRS Revenue Procedure (2011-14) makes it possible for those owners to take deductions for qualifying energy improvements made in earlier tax years without filing an amended tax return.
Previously, rules limiting the time to amend tax returns to three years effectively cut off 179D benefits for prior years. With Rev. Proc. 2011-14, it is possible to take deductions for improvements placed in service as far back as 2006 because an amendment is not required. “Both of these changes make it easier and less time-consuming for commercial property owners to take the deductions,” said Carol Hayward, senior executive with Engineered Tax Services of West Palm Beach, FL.
Under the new ruling, commercial property owners, leaseholders, and designers of government buildings can take the deduction for energy improvements by adjusting their current year’s income and expense using the change of accounting rules in Rev. Proc. 2011-14 and then including the adjusted figures on their current tax return. The taxpayer files a Form 3115 that calculates the adjustment, along with the certification and evidence of energy efficiency that is normally required to claim the 179D deduction.
Section 179D provides for a tax deduction of up to $1.80 per square foot if improvements enable a building to reduce energy consumption by 50 percent when compared to a 2001 ASHRAE baseline in qualifying systems such as HVAC, lighting, and building envelope. Partial qualifications within each of the systems are also available. The deduction is available for work completed and placed in service through the end of 2013.
Some of the rules for the new procedure can be complicated, but “it can be a huge win for all taxpayers who can properly claim the 179D deductions,” said Hayward, who works hand in hand with John J. Cummings of Engineered Tax Services and is a national speaker on this topic and has created an educational piece with CNBC.
The research shows that fewer than 5 percent of eligible buildings' owners or leaseholders have taken advantage of these benefits. The ruling is designed to encourage the building of more efficient buildings. So far, however, the process has low awareness and requires 3rd party engineering or contractor certification.
Architects, Engineers, Contractor Designers
The benefits get even better for the designer of a new construction or renovated government building. The government doesn’t pay tax, so what happens when the tens of thousands of schools, federal, and state buildings are built or upgraded? Prior to 2008 this tax benefit was simply lost or wasted. The government quickly realized that in order to encourage architects and designers to implement energy efficiency in federal buildings they had to provide encouragement. The EPAct was amended to run until 2013 and included a provision that for all public government buildings the EPAct tax benefit would go back to the designer of the specifications which could be the architect, engineer, contractor, or environmental consultant through an allocation letter. This has resulted in approximately $25 million per month in tax benefits being discovered by one engineering/tax firm alone.
About the authors
Carol Hayward and John Cummings are with Engineered Tax Services, (ETS), one of a handful of U.S. companies specializing in EPAct certifications to claim these tax deductions. ETS offers 3rd party evaluation services. To learn more details related to the Energy Policy Act of 2005 please contact Carol Hayward at 1-800-236-6519 or e-mail [email protected].