Tax Incentives Blog

Is your company aware that certain tax incentives expired within The Protecting Americans from Tax Hikes Act, known as the PATH Act? However, have no fear, there are still many components that are still active.

Even though parts of the PATH Act expired, on the whole, green building tax incentives remain an important tax savings strategy for businesses. In direct proportion to the growing efforts to reduce energy consumption, companies that own commercial or industrial property will continue to need insight and guidance on green building incentives.

The section 179D deduction provides benefits for businesses, architects, engineers and contractors when they build or renovate a building that is energy efficient. In addition to the 179D deduction, the 45L tax credit also is not applicable in 2017. The 45L tax credit was applicable when building units provided a level of heating and cooling energy consumption that is lower than national energy standards. However, the good news is any project placed in service prior to 1/1/2017 is still eligible to have a 179D or 45L study conducted.

Cost segregationis a key project for identifying your opportunities to capture green building tax incentives. A cost segregation study breaks down costs and documents the information you need to claim green building benefits.

Typically, green building tax incentives are complementary projects to cost segregation, where the analysis is primarily focused on accelerated depreciation for fixed asset tax deductions.

When doing a green building tax benefit  project, however, the energy incentives are at the forefront. Even still, it’s highly recommended to conduct a cost segregation study. The study is the best way to get detailed information on the costs and construction/engineering specifics of your building. Additionally, the study also naturally lends you the tax benefit of accelerated depreciation.

Green Building Tax Incentives: Pursue These Programs

Developers and property owners who practice green building techniques actually create demand and encourage innovation within the world of green building technologies. That’s why the U.S. government is more than willing to offer tax benefits that motivate all energy efficiency efforts in a collective mission to lower energy costs and preserve the planet.

The recently passed PATH Act includes a two-year extension of the Energy-Efficient Commercial Building Deduction, also known as section 179D of the tax code. This is largely due to growing awareness that the 179D deduction is a vital benefit for businesses.

“By extending 179D tax deduction, Congress has done architects, engineers and contractors a major favor as we have seen firsthand how this incentive has helped companies expand both their workforce and the scope of their services,” said Dean Zerbe, alliantgroup national managing director and former senior counsel to the U.S. Senate Finance Committee, in a recent article published by Proud Green Building. 

The landscape of cost segregation and depreciating fixed assets is vast, complex and constantly changing, due to governmental regulations. Cost segregation studies (and the subsequent work involved) require expertise in both tax guidance, construction and facilities engineering – this isn’t something you should expect your CPAs or clients to grasp without some level of guidance.

And yet, the “new normal” for CPA firms today is centered squarely within a client centric environment with the challenge of fulfilling traditional core accounting services, while also providing knowledge, information and services to capture every allowable tax benefit.

**This case study is an amalgamation of CTI client success stories – based on real-life outcomes – to showcase a balanced, conservative perspective in the interest of not inflating numbers or empty promises.**

Company XYZ, Inc. is a food manufacturing company with four facilities spread throughout California, including its headquarters facility, which is located in Sacramento.

The Problem

Historically, the company had not been in a taxable position. As a result, they typically categorized all new construction, renovation and acquisition fixed asset costs using the straight-line depreciation (39-year) method.

This year, however, the company faces a significant tax liability and is pursuing opportunities for accelerated depreciation deductions.

Perhaps you have a lot of fixed asset additions each year that include a variety of tangible personal property and real estate assets, but are unfamiliar with or not particularly savvy in the ways of cost segregation. Or, perhaps your business is finally emerging out from under the recession’s thumb or you’re a thriving startup that’s recently become taxable and may now reap the rewards of cost segregation and broadened real estate tax strategies.
Whether or not you’ve done cost segregation historically for your business, you likely understand that you’ll need help conducting a solid cost segregation study – one that captures and substantiates the maximum allowable deductions.

Although the final regulations are most significant for fixed asset intensive industries (i.e. electric utilities, telecom, retail, etc.), or real estate property owners that consistently incur capital expenditures to maintain their facilities, small business owners are also seeing some advantages from certain aspects of the Tangible Property Regulations.

Small businesses like yours are able to deduct many expenditures immediately and accelerate the depreciation on others, rather than spread them out over a longer period of years as annual depreciation deductions.

As a CPA, when considering real estate tax strategies for your clients, you may be wondering which clients warrant a formal fixed asset review outside of the efforts made by your firm or your client when maintaining annual tax depreciation.

As you consider outsourcing fixed asset review work to a tax consulting firm, keep the following questions in mind:

Do your CPAs maintain clients’ fixed asset depreciation?

Deprecation is an important, but sometimes overlooked, aspect of the tax return preparation process – sometimes CPA firms are involved in that process and sometimes they’re not and the answer may vary by client. Many times with smaller or less fixed-asset-intensive clients, the client does the work, sending everything to the CPA for a cursory review before signing off on the tax return. It’s easy to see the potential exposure or missed opportunity that may result from this practice. 

The main trigger to consider conducting a fixed asset disposal study is when you plan to renovate real estate property. When planning to demolish or renovate a building – whether tearing out lighting, HVAC units or other components – these assets are effectively abandoned or retired from the building. The tangible personal property’s remaining depreciable basis can be written off (for tax) once the asset is retired.

The concept is simple enough, but the challenge can be ascertaining the correct value for the component parts of the building. By performing a cost segregation on the original acquisition of the building, you obtain the value of the original components at the snapshot in time of the acquisition, thereby allowing you to the write off the remainder of the basis upon disposition of that old property.

To claim tax deductions, a property owner needs to apply the non-cash depreciation expenses against their taxable income, which effectively offsets tax liability. Instead of utilizing a straight-line depreciation method for real estate assets to capture tax deductions, your clients can accelerate the depreciation of fixed assets via a cost segregation study that generates significantly more tax benefit.

Depreciating assets over a shorter tax life results in considerably more annual tax deductions for the property owner, especially within the first five years of the building’s lifecycle. Further, by conducting a formal cost segregation study, you are assured the correct and most beneficial taxable life for all assets, based on relevant tax rules established by the IRS.