Balancing the 179D extension with the TCJA
After months of waiting, Congress finally moved forward with tax extenders in late 2019. Included in this extenders package was an extension to the Section 179D Energy Efficient Building Deduction. The extension of this deduction is seen as a win for both building owners and designers. However, in the case of building owners, it’s important to discuss this deduction with accountants and advisors prior to moving forward with an analysis.
The 179D tax deduction has been around since it was introduced under the Energy Policy Act of 2005. It allows taxpayers to take up to $1.80 per square foot against the installation of energy-efficient improvements to real property. To take the deduction, a third-party calculation and certification must be completed. This certification is to confirm that the building meets certain metrics as outlined in the ASHRAE 90.1-2007 standards. Additionally, in certain situations, the deduction can be transferred from government-owned buildings to the engineer or architect responsible for the energy-efficient design.
Although this deduction was created almost 15 years ago, it expired on Dec. 31, 2017. The tax package calls for the deduction to extend through Dec. 31, 2020. This means taxpayers now need to look at how the extended 179D deduction interacts with Section 179 and bonus depreciation regulations under the Tax Cuts and Jobs Act of 2017.
The 179D deduction can be split among three areas of a building: the envelope, the lighting system and the HVAC system. This follows closely with the Section 179 expensing regulations, which allow for HVAC, qualified improvement and roofing to be included if placed in service after a building is originally completed. This means that, in certain situations, an asset may be eligible for consideration under both the 179D and 179 expensing regulations, depending on how a taxpayer renovates a building. For example, a manufacturing company that upgrades its lighting system could potentially write that off under Section 179 (as qualified improvement property) or take it as a 179D deduction.
It is important to note that 179 expenses are capped at $1 million, with a $2.5 million phaseout. Additionally not all businesses are 179 eligible — for example, many real estate businesses cannot take 179 due to the business use test. However, the close connection between 179 and 179D shows why taxpayers should talk to their CPAs prior to hiring a provider to complete a 179D analysis. This is especially true when looking at assets placed in service in 2018. For these assets, taxpayers will want to establish with their CPA firm how they were capitalized to confirm the 179D savings.
Obviously, many factors need to be considered when talking about tax deductions. As many tax preparers have realized over the last year, the TCJA has added significant complications to tax planning. The 179D deduction extension is another area of potential complication. That said, it can lead to significant tax savings for eligible taxpayers. This year, it’s more critical than ever that taxpayers talk to their CPAs about these important tax-planning tools.