Tax Incentives Blog

The whole intent of Section 179D is to provide an incentive in the form of a tax deduction to building owners who install energy-efficient lighting, windows & doors, roofing, insulation, and Heating, Ventilation, and Air Conditioning/Hot Water (HVAC/HW) equipment in new buildings or retrofit projects. All buildings in the US are eligible for the 179D deduction, except housing units less than 4 stories above ground. The Inflation Reduction Act of 2022 (IRA) affected section 179D in several ways, and the next three years will present a golden opportunity for the owners and designers of energy-efficient commercial building property (EECBP).

When it comes to commercial real estate investments, one aspect that often goes unnoticed is the potential tax benefit through cost segregation. This powerful tax planning tool allows property owners to accelerate depreciation deductions, resulting in significant savings. In this blog, we will explore the concept of cost segregation, its benefits for companies, and the available guidance provided by the Internal Revenue Service (IRS). We will also delve into why the IRS requires engineers to perform cost segregation studies and its implications for accuracy and compliance.

Since its creation in the Energy Policy Act of 2005, the Section 179D Energy Efficient Commercial Building deduction has provided an incentive for taxpayers to install energy-efficient commercial building property (EECBP) as part of the building envelope, lighting, and/or Heating, Ventilation and Air Conditioning/Hot Water (HVAC/HW) systems. EECBP comprises light fixtures, switches, HVAC equipment, automated controls, ducts, water heating, windows, doors, insulation, and roofing. EECBP may be installed in a new building, or it may be part of a retrofit project for an existing building. Buildings that qualify for 179D include almost all buildings in the United States except residential housing less than four stories above ground. That’s a lot of eligible buildings!

With the expansion of the Employee Retention Credit (ERC), there has been a flurry of amended returns for companies that previously were unaware of the credit or were ineligible under the initial statute. As more and more companies become educated on the credit and their eligibility, there has been confusion over the timeline to submit ERC claims.

You’ve seen the advertising for larger companies – slogans like “Hire a Vet” or “We Offer Second Chances” – appealing to certain groups that would be interested in applying for a job, sparked by this type of focused outreach. To combat the labor shortage that some companies are facing, they are expanding their hiring pool to drum up new applicants that might have barriers to employment. These hiring initiatives help to drive down the unemployment rate for groups that have a hard time re-entering the workforce after transitioning from challenging life experiences.

For several years, CTI has championed construction companies’ eligibility for the credit for increasing research activities (“R&D tax credit”) under Section 41. We have worked with numerous construction companies to successfully identify, calculate, and substantiate the credits. The most recent tax court opinion lends support to the qualification of many aspects of design-build construction projects.

Current State of Section 174

As discussed in our recent blog, the Tax Cuts and Jobs Act (TCJA) of 2017 included a delayed provision that requires taxpayers to begin capitalizing and amortizing research and experimental (R&E) expenditures under Section 174 for tax years beginning after December 31, 2021. Prior to this provision, taxpayers had the option to deduct R&E costs in connection with the taxpayer’s trade or business during the taxable year incurred. Starting in tax year 2022, R&E costs will need to be capitalized and amortized over a 5-year period for domestic expenses and over a 15-year period for foreign research, beginning with the midpoint of the taxable year in which such expenditures are paid or incurred.

Recently, the Internal Revenue Service (IRS) published its annual Dirty Dozen list, which is intended to raise taxpayer awareness of potential scams and fraudulent tax practices. The list includes cautions against falling prey to scammers calling and texting to pose as IRS or state tax officials, reminding taxpayers that the IRS initiates contact with taxpayers primarily through regular mail and never through email, text, or social media. Additionally, the IRS advised against acting on tax tips posted on social media, noting a couple of specific tax schemes that have recently gone viral amount of tax fraud.

Cost segregation is the process of identifying property components that are considered "tangible personal property" or "land improvements" under the federal tax code. The primary goal of a cost segregation study is to identify all construction-related costs that can be depreciated over a shorter tax life (typically 5, 7, and 15 years) than the building (39 years for non-residential real property or 27.5 years for residential rental property).

Two recent court opinions – Moore v. Commissioner and Little Sandy Coal v. Commissioner – reiterate the pitfalls of claiming the Research & Development (R&D) Tax Credit without sufficient documentation. In both cases, the courts completely disallowed the taxpayers’ R&D tax credit despite recognition that the taxpayers undertook R&D activities and had some level of R&D expenses. The issue was that the taxpayers did not meet their burden of proof to show that all of the activities and associated expenses qualified, and the taxpayers did not provide a reasonable basis for estimating what portion could be properly included.