179D Energy Efficiency Tax Deduction
There are many nuances and variables with this tax deduction for commercial building owners and it’s not quite that easy to say who and how one qualifies for this. The laws changed recently which do affect buildings placed initially into service in 2023 / 2024. It used to be owners could get up to $1.80/SF for a tax deduction but now it’s been revised upward to $5/SF. Here’s the official IRS web page for the 179D deduction.
It’s really designed for buildings with about 40,000 SF or more given the math between the cost of the study and the tax deduction. It might make sense at 30-35,000.
But let’s say you have a 100,000 SF building. It might qualify for up to $5/SF which would be a $500,000 tax deduction. The interesting thing is this deduction is not subject to the current bonus depreciation schedule so you get 100% of this tax deduction. The other thing that I think is very powerful is this deduction hits your depreciation schedule and reduces the 39 year class life property. Most of us are used to the 5 and 15 year class life deductions with cost segregation and the use of bonus depreciation. This hits the 39 year line…nothing hits the 39 year line unless it’s 179D or a partial asset disposition.
This works if you are the initial owner / developer of the building. If you are the second, third, fourth owner etc., it does not work unless you’ve done some significant improvements including lighting, HVAC, building envelop and/or roof. But I know there are some significant buildings out there where those kinds of renovations are being done. They always should get a cost segregation study done for those improvements but you should also evaluate 179D.
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