By Terri S. Johnson, CRE

When it comes to tax planning, the most thoughtful and comprehensive efforts should leverage as many strategies as possible. Savvy taxpayers are increasingly turning to a powerful trio of tactics to help maximize their savings: cost segregation, the 179D deduction, and the investment tax credit (ITC).

Cost segregation, which is an excellent way to decrease tax liability and increase cash flow, can be performed on virtually any type of property. But if that property was recently constructed or improved, it may also qualify for the 179D deduction to boost benefit. Then, if certain energy-efficient products such as solar panels are involved, the ITC may also be claimed.

Combined, these three options can create a triple stack of incentives that will maximize savings and boosts return on investment.

Cost Segregation

Cost segregation analysis is a tax planning strategy that helps real estate owners accelerate depreciation deductions. Although standard depreciation occurs over a lengthy 39-year period, many assets within a structure – from plumbing and electrical fixtures to flooring – are not designed to last that long. Cost segregation engineers can break out shorter-lived assets for five-, seven-, or 15-year recovery periods to help accelerate depreciation, defer taxes, and improve cash flow.

A quality cost segregation study can be used to identify opportunities for additional tax savings, such as the 179D deduction, or provide the data required to claim the ITC.

179D Deduction

The 179D tax deduction is a federal incentive that rewards energy-efficient construction and design. It may be taken on energy-efficient commercial buildings as well as residential rental buildings that are at least four stories tall.

The 179D deduction is the perfect complement to cost segregation because it permits an immediate deduction of energy-efficient improvements that are not eligible for accelerated depreciation:

• Building envelope
• HVAC
• Lighting

Improvements to these areas cannot be moved to shorter class lives in a cost segregation study, but a 179D deduction permits their immediate write-off. This allows taxpayers to simultaneously accelerate some deductions where possible, while immediately deducting the cost of assets not eligible for segregation.

Incorporating 179D into a cost segregation study can be a strategic and seamless add-on.

Investment Tax Credit

The ITC is a federal incentive that encourages the adoption of renewable energy systems, such as solar panels. The ITC is a dollar-for-dollar credit that can reduce tax liability on a system by 30% or more. If certain criteria are met, the ITC can reduce tax liability by up to 70%. This substantial credit can help offset the initial expense of installing solar panels or other renewable systems.

To claim the ITC, you need to quantify and assign costs to all the components of your energy system. That will require a quality cost segregation study.

If you’re already considering a cost segregation study, the ITC is an easy and affordable add. By performing the studies in tandem, you’ll maximize the benefits of the ITC while enjoying accelerated depreciation, increased cash flow, and decreased tax liability.

The Triple Threat

A holistic approach that examines all possible opportunities is the key to success. The more strategies you can stack, the more you can save. The Inflation Reduction Act of 2022 (IRA) has reinvigorated interest in energy incentives, and we’re seeing more investors pair them with a cost segregation study.

Consider Auto Dealership XYZ. It constructed a new dealership and placed it in service in June 2023, with a depreciable basis of $8,558,583.

After a cost segregation study, Capstan quickly noticed multiple costs indicating energy-efficient features:

• LED lighting
• Efficient multistage gas-fired/DX air handling units with energy recovery ventilation
• Extra wall insulation
• Solar panels and associated infrastructure

Our team realized that Dealership XYZ could benefit from all three incentives discussed in this blog. The 179D deduction would be especially effective due to the dealership’s large surface area (26,235 square feet).

Here is how the savings broke down:

Cost Segregation

• 6.3% of assets moved to 5-year
• 20.4% of assets moved to 15-year
• First-year tax savings were $635,325

179D Deduction

• The dealership qualified for the maximum post-IRA benefit of $5.36/square foot
• 26,235 square feet X $5.36/square foot = $140,620 deduction value

ITC

• An additional $200,000 in energy property moved to 5-year
• $200,000 x 30% = $60,000 ITC value
• Plus, additional bonus depreciation on the energy property
  - Depreciable basis of the energy property = $200,000 – ½ ($60,000) = $170,000
  - In 2024, 60% of this value can be written off as bonus

Individually, these incentives provide significant benefits, but taken together, they amplify each other to maximize tax savings.

To thoroughly leverage multiple strategies, you’ll want a provider with expertise in multiple services and their integration. To discuss your potential savings opportunities, reach out to Capstan.

Terri S. Johnson, CRE, is partner at Capstan Tax Strategies. She works closely with taxpayers and accounting firms to provide practical and customized engineering-based tax solutions. She can be reached at tjohnson@capstantax.com.

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^{Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.}