When it comes to reducing tax liabilities and maximizing cash flow, leveraging both Section 179D deductions and Cost Segregation studies can be a powerful combination. These two strategies are particularly advantageous for property owners, designers, and developers of energy-efficient buildings. Let’s explore how these tools work together to unlock significant tax savings.
What is Section 179D?
The Energy-Efficient Commercial Buildings Deduction, commonly referred to as Section 179D, is a tax incentive that rewards energy efficiency in commercial buildings. Qualifying property owners and designers can claim deductions for improvements to Lighting, HVAC systems, and the building envelope. The deduction, which can be as high as $5.81 per square foot (as of 2023 updates), provides immediate benefits to taxpayers who implement energy-efficient designs.
Understanding Cost Segregation
Cost Segregation is a tax strategy that involves analyzing a building’s components to reclassify certain assets into shorter depreciation categories. Instead of depreciating a property over 39 years, a Cost Segregation study can allocate portions of the building to 5-, 7-, or 15-year categories, accelerating depreciation and boosting cash flow in the early years of ownership.
The Synergy Between 179D and Cost Segregation
Combining 179D deductions with Cost Segregation amplifies the tax benefits for property owners and designers. Here’s how:
- Enhanced Deduction Opportunities: 179D deductions are typically from the analysis of “long life” assets such as building envelope, roofing systems, HVAC, and some plumbing systems. Because 179D focuses on these long life assets there is generally no overlap between the benefit from a cost segregation study and the benefits from a 179D study. The 179D study would add to the benefit derived from the cost segregation study.
- Increased ROI on Energy-Efficient Upgrades: Cost Segregation provides accelerated depreciation benefits for specific building components, while 179D rewards with immediate deduction benefits for energy-efficient designs. Together, they reduce the net cost of implementing energy-efficient systems, making such upgrades more financially appealing.
- Strategic Tax Planning: Property owners can time their Cost Segregation studies and 179D certifications to maximize tax benefits in high-income years. This strategic approach ensures optimal use of both deductions.
Example Scenario
Imagine a developer constructs a 100,000-square-foot commercial building and invests in energy-efficient lighting and HVAC systems. A Cost Segregation study reveals that $2 million of the building’s components qualify for accelerated depreciation. Simultaneously, a 179D certification confirms that the energy-efficient systems qualify for a $500,000 deduction. Together, these strategies allow the developer to significantly reduce their taxable income in the first year of ownership.
Who Can Benefit?
- Building Owners: By combining 179D and Cost Segregation, owners of new or existing buildings can significantly reduce their tax liabilities.
- Architects and Designers: Eligible designers of government-owned and non-profit energy-efficient buildings can claim 179D deductions for their contributions.
- Real Estate Developers: Developers can enhance the financial feasibility of projects by leveraging these tax-saving opportunities.
Key Considerations
- Certification Requirements: To claim 179D deductions, energy-efficient improvements must exceed minimum 2007 ASHRAE standards, and a third party licensed professional engineer must certify compliance.
- Qualified Professionals: A Cost Segregation study should be conducted by experienced professionals who understand the interplay between tax laws and building components.
- Legislative Updates: Tax laws evolve on a yearly basis, and staying informed about changes to 179D and Cost Segregation regulations is essential for maximizing benefits.
- Bonus Depreciation Phasing Out: With bonus depreciation phasing out, more than ever 179D is a great benefit to compliment a Cost Segregation study for larger tax benefits in the current tax year.
Conclusion
The combination of Section 179D deductions and Cost Segregation is a game-changer for property owners and developers seeking to optimize their tax strategies. By integrating these approaches, you can enhance immediate deductions, improve cash flow, and make energy-efficient investments more accessible and appealing.
If you’re ready to explore how 179D and Cost Segregation can benefit your property, contact us at CSSI today to start maximizing your savings.