IRS Eases Method to Take 179D Tax Deductions for Energy Efficient Buildings

The IRS has just made it possible to take tax deductions under section 179D by way of an automatic “change of accounting” method instead of amending prior tax returns. In addition, the IRS is making it possible to take advantage of those deductions as far back as 2006.

Previously, taxpayers who wanted to take this tax deduction for qualifying energy efficient commercial buildings under the Energy Policy Act had to either:

  1. Take the deduction in the current tax year (if they were able to qualify their deductions in time for tax filings) or,
  2. If they wanted to take the deduction for properties placed in service in prior tax years, they would need to amend their tax returns for those prior years.

Even worse, the accounting rules for taking this type of deduction only allow taxpayers to amend a return within three years.

While the IRS does not have a reputation for making accounting easier when it issues new revenue procedures, it seems that is exactly what they have done.

179D is a deduction for energy-efficient building property. To be considered for this deduction, the building must have been placed in service after December 31, 2005. The types of property that qualify for the deduction include interior lighting systems, HVAC, hot water systems, and the building envelope (insulation, doors, windows, and roofing materials). In addition, it must be certified that after installation, the above mentioned qualified property reduces the total annual energy and power costs by 50 percent or more, as compared to a Reference Building that meets the minimum requirements of Standard 90.1-2001.

While the new ruling in claiming the deduction has been simplified, the deduction itself remains complicated. Many factors are involved and there are a myriad of issues affecting tax basis, accounting methods and multiple income and expense issues, in addition to just 179D.

If you think your building may qualify, or you just want to know more about 179D, members of our Real Estate and Construction team are anxious to answer your questions. If you are designing, building or renovating, let us help you make sure you are not missing out on a valuable tax deduction.