Monthly Archives: January 2015

179D Federal Energy Tax Deductions

If you own a building you may be overlooking a very important tax deduction that can, if applicable, can provide substantial tax savings for your business.

What is this little known tax break? Section 179D. This is the section of the tax code that provides a benefit for businesses when they build or renovate a building (or design a government building in the case of an architect, engineering or contracting firm) that is energy efficient. The deduction can be up to $1.80 per square ft.

New Buildings

Most states now require that new buildings surpass 2001 ASHRAE standards. If the building does, it will qualify or partially qualify for 179D.

Building Improvements

As building owners, you know that many systems in the building require periodic replacement long before they are fully depreciated such as HVAC/hot water systems, interior lighting systems, etc. There are a number of ways that these building improvement can qualify or partially qualify for the 179D tax deduction.

Attention Architects, Engineers and Contractors

The tax law provides that a government agency (federal, state or local) can allocate the 179D tax benefits to the architect/engineer/contractor engaged in designing and building government buildings. The architect, engineer or contractor is assigned the tax benefit from the government agency. In fact, you can go back three years and obtain this benefit. Meaning that you can review government buildings you helped design or build that were placed in service in the last three years — receive an allocation letter from the government and amend your tax returns and obtain the 179D benefits.

Building Owners & Tenants

The owner of the building or improvement can go back to buildings put in service or improvements made in the last six years – – and they will qualify for 179D. The building owner takes the deduction in the current year and reduces the basis in the building or improvement. For building owners, 179D provides a potentially significant timing benefit in paying taxes.
Tenants can also qualify if the tenant paid for and owns the improvement.

What qualifies?
• Commercial buildings (any size).
• Apartments, four+ stories, for lease.
• Commercial energy renovations.

What is the time frame for eligibility?
Units must be completed or renovated after December 31, 2005 but before December 31, 2014.

 

For more information, contact your Dugan & Lopatka CPA at (630) 665-4440.

Will the New “Repair Regulations” Affect Your Business?

After years of work, the IRS has finally issued regulations clarifying for the business community when costs related to fixed assets must be capitalized and when they can be expensed.

To Expense or Capitalize? What’s the Difference?

Generally, the cost to acquire, produce, or improve tangible property must be capitalized and depreciated over a number of years. On the other hand, the cost of repairing and maintaining fixed assets is deductible in the year of the expense.

The difficulty has been distinguishing between the two kinds of costs. Is the expense a “repair or ordinary maintenance” that can be deducted on the current year’s tax return, or is it an “improvement” that must be capitalized and depreciated over the life of the asset?

If you buy, build, or repair business assets, you might have questions when trying to decide whether your costs are currently deductible on your federal income tax return or whether they are capital improvements.

Since deductions for capital improvements are typically spread over the life of an asset, the answer can be important even when accelerated depreciation methods are available.

The new “repair regulations” are the IRS’s attempt to clarify when costs may be currently deducted and when they must be capitalized. The newly issued tax rules can make the expense-or-capitalize decision easier for your company. These repair regulations provide guidelines and safe harbors to help you determine when certain purchases and expenditures are considered repairs, maintenance, improvements, materials, or supplies that can be deducted in the year of purchase.

Safe Harbors in the New Rules

Here’s an overview of safe harbor rules that may affect the way you classify expenses.

  • De minimis purchases
    In general, you can deduct the cost of tangible property purchased during a taxable year if the amount you pay for the property is less than $500 per invoice, or per item. This is an all-or-nothing rule, meaning if an asset costs more than $500, you cannot take a partial deduction.

To take the deduction, you’ll need a written accounting policy in place by the beginning of your tax year, and you’re required to file an annual statement with your federal tax return.

Note: This safe harbor does not apply to intangible assets such as computer software.

  • Repairs and maintenance
    You can expense costs for routine maintenance of buildings and other property. For buildings, “routine” means maintenance you expect to perform more than once in a ten-year period. The costs for material additions or defects or for adapting your property to a new or different use are not considered routine maintenance, and they should be capitalized.

For other assets, “routine” is defined as maintenance you expect to undertake more than once during the asset’s depreciable class life.

  • Improvements
    Generally, improvements you make to your business building are capitalized and depreciated over the life of the building. Under the new rules, if your business’s gross receipts are ten million dollars or less and the unadjusted basis of your building is one million dollars or less, you may choose to write off the cost of improvements.

You can make the election annually on a building-by-building basis for property you own or lease by filing a statement with your tax return. To qualify, the total amount you pay during the year for repairs, maintenance, and improvements cannot be greater than $10,000 or 2% of the unadjusted basis of the building, whichever is less.

Note: The total includes amounts you deduct under the “repairs and maintenance” and “de minimis” safe harbors.

  • Materials and supplies
    Incidental materials and supplies (supplies for which you do not maintain an inventory) costing less than $200 can be expensed in the year of purchase.

Note: This safe harbor does not affect prior rules for deducting materials and supplies, such as restaurant smallwares.
The repair regulations are effective for tax years beginning after 2013, so they will apply to your 2014 federal income tax return. In some cases, you can apply the new rules to prior years.

The repair regulations are more than 200 pages long. Filled with various effective dates, requirements, definitions, exceptions, and safe harbors, they are anything but concise and clear. As with any part of the tax law, these regulations contain numerous complex provisions that could result in tax savings or additional costs for your business. If your company owns or leases fixed assets, contact your Dugan & Lopatka CPA at (630) 665-4440 for assistance in applying the rules to your business.