The recently issued “repair regulations” provide guidance regarding the capitalization of amounts paid to acquire, produce or improve tangible property. 

Final tangible property repair regulations provide rules covering three general areas:

• Costs to acquire or produce tangible property;
• Costs to improve tangible property; and
• Dispositions. 

The tangible property regulations provide guidance to taxpayers to help determine the types of costs incurred for a current year expense, versus those that should be capitalized. The determining factors are “facts-and-circumstance-based” and a professional should be consulted to help you navigate the TPR.

The above regulations are taxpayer favorable, encouraging you to take these additional write-offs as you improve certain types of tangible property. Through a deep analysis of your expenses for building repairs and maintenance, you may reduce your tax liability and improve cash flow by properly reclassifying these expenses.

 Deductible tangible property expenses may include, but are not limited to:

• Roof repairs;
• Replacing lighting;
• Resurfacing parking lots;
• Replacing doors and windows;
• Resurfacing interior or exterior floors;
• Painting, interior and exterior; and
• Rekeying locks.

 It should be noted that these repair regulations contain a huge set of complex compliance guidelines. By incorporating these considerations within an engineered-based cost segregation study, you can cut through the complexity and maximize the allowable deductions.

With the help of a construction manager or engineer and a CPA with specialized experience in cost segregation and the tangible property regulations working in tandem, you gain full access to real estate tax incentives that lie beyond tangible property regulations and cost segregation. 

After you and your cost segregation experts look at the standard study to determine capital expenditures or costs, you also want to assess your eligibility for energy efficiency deductions. 

Substantial Energy Efficiency Incentives You Might Be Missing

Your cost segregation study should include an assessment – based on your facility type and quality of systems – of anything that might be available for energy efficiency incentives. If it does not, you are likely missing out on further tax savings. 

One common energy efficiency incentive pertains to the 179D incentive, which includes a wide range of properties that conduct commercial-energy-related renovations. 

The deductions for the 179D incentive include the following:

• Maximum deduction: $1.80 per square foot equaling a 50% reduction in total annual energy and power costs, which are not to exceed the amount equal to the cost of energy efficient commercial property placed in service during the taxable year.
• Partial deduction: $0.60 per square foot/per system for reduction of energy consumption of the building envelope.
• Partial deduction: $0.60 per square foot/per system for reduction of energy consumption through HVAC.
• Partial deduction for interim lighting: From $0.30 to $0.60 per square foot equaling a 25-40% reduction in lighting power density (50% in the case of warehouses).

Even if you only received a partial deduction of $0.60 per square foot for a 40,000-square-foot warehouse, you’d receive a substantial tax deduction benefit of $24,000, which equates to $8,400 of tax-effected benefit (calculated at a 35% rate). This money could help recover the costs of your energy efficiency projects or support future initiatives to save on energy costs.

Missing out on energy efficiency deductions – that are rightfully there for you to take advantage of – is a huge disservice to the financial stability of your business. It also means you’re missing out on viable ways to achieve ROI on your investment within a cost segregation study.

Ready to learn more about maximizing your deductions from cost segregation? Download your complimentary, educational guide below.