By Bruce A. Johnson, CRE, CEM
We’ve long been anticipating an extension of EPAct 179D and 45L, as these energy incentives can be quite powerful, particularly for larger properties. When President Trump signed the Further Consolidated Appropriations Act into law on Dec. 20, 2019, it reestablished Section 179D and 45L programs retroactively back to Jan. 1, 2018, and extended them forward through Dec. 31, 2020.
These two programs were initially enacted as part of the 2005 Energy Policy Act (EPAct) to incentivize taxpayers to design and improve properties for better energy efficiency. This most recent extension legislation means projects placed in service after Dec. 31, 2005, and before Jan. 1, 2021, may qualify for certain tax incentives.
Properties eligible for the 179D deduction may be either commercial property or residential rental property at least four stories high. New construction and renovation projects are both eligible for this tax strategy. This is a one-time deduction benefit: while it is best claimed in the year of construction, it can be claimed retroactively using a 3115 Change in Accounting Method.
A 179D deduction of up to $1.80 per square foot is available for the cost of developing energy-efficient property. This is achieved by qualifying for a deduction of up to $0.60 per square foot in three key areas: interior lighting, HVAC, and building envelope. The deduction is based on total improved square footage, but it cannot exceed the cost of the energy-efficient improvements. Clearly, the best candidates are the largest candidates, and properties like hotels, retail facilities, warehouses, trucking terminals, and industrial facilities are excellent choices.
To claim a 179D deduction, a taxpayer must be able to document the reduction in energy consumption generated by the improvements. Reduction in consumption is compared to a set benchmark determined by the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE). Improvements in interior lighting are the easiest to document—a simple spreadsheet is enough to do the trick. Often, retrofits involving LED lighting are efficient enough to qualify for the 179D deduction on their own. Taxpayers who also wish to document improvements in HVAC or building envelope will need to submit a more thorough document, including building modeling using software approved by the Department of Energy. Buildings that qualify for the 179D deduction must be inspected and certified by a professional contractor or engineer who is based in the same jurisdiction as the property.
Unlike the 179D tax deduction, the 45L incentive is a tax credit. Eligibility for the 45L credit is restricted to for-sale residential homes and residential rental property with a maximum of three stories, providing a $2,000 per unit tax credit for qualifying units. Credits can be earned on newly constructed or rehabilitated property, but they may be difficult to claim retroactively due to the logistical challenges in quantifying costs of materials.
Taxpayers are encouraged to consult with their advisers regarding eligibility of past projects and planning considerations for future projects. Going green never left, but tax incentives are back in style.
Bruce A. Johnson, CRE, CEM, is a co-founder and partner at Capstan Tax Strategies. Johnson works closely with commercial real estate owners and accounting firms to provide practical, creative, and customized engineering-based tax solutions.
Johnson previously shared details on this matter in a PICPA CPA Conversations podcast in January 2019.
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