In the realm of energy incentives and tax benefits, Section §179D offers a valuable opportunity for commercial real estate clients to reduce their taxable income and bolster their cash flow. However, to take full advantage of this provision, it is crucial to stay well-informed about the current rules, rates, regulations, and its scope of applicability.
A key aspect of the ongoing deliberations on tax and spending legislation is the "Build Back Better Act" (BBBA), which encompasses an extensive array of investments and incentives aimed at upgrading residential and commercial buildings. The proposed bill includes provisions supporting electric vehicles, energy storage, renewable energy sources, and advancements in the electric grid infrastructure.
Although the $1.7 trillion BBBA has faced extensive debates, there remains a possibility that it could be passed before the year's end, especially with the extension of the debt ceiling issue until February 2022. While disagreements within the Democratic caucus have caused some delays, they are not insurmountable obstacles.
During discussions at the recent Kentucky Society of CPAs annual Commercial Real Estate Conference, it was revealed that the Ways and Means Committee's proposed bill intends to modernize and revamp the existing incentives for energy efficiency improvements in buildings. Under this bill, the Sec. §179D incentive for energy-efficient buildings would see a substantial increase starting in 2022, with incentive levels rising from the current $1.80 per square foot for efficiency improvements to a sliding scale of $2.50 to $5.00 per square foot. Additionally, the bill aims to replace the lifetime maximum with a three-year cap, and the changes would be effective until December 31, 2031.
Furthermore, the bill proposes a new framework to make the deduction more accessible for retrofitting existing buildings. This framework would include an inflation adjustment for 2022 and open up the so-called "designer allocation" to all tax-exempt entities, including Indian tribal governments.
For those engaged in commercial real estate with energy-efficient buildings, this fact pattern offers significant tax-saving opportunities. However, to capitalize on these incentives effectively, professionals must be well-versed in the specifics of the legislation and know where to direct their focus. Notably, primary designers of energy-efficient buildings may discover new opportunities for collaboration with not-for-profit organizations as a result of the proposed legislation.
START WITH A TEAM APPROACH
In the realm of commercial real estate, navigating the complexities of energy incentives can be overwhelming, regardless of whether you cater to numerous clients or are new to the field. To ensure that tax incentives are maximized, it is imperative that the energy design is accurately incorporated from the outset. Just like constructing a sound financial stack, the design plays a crucial role in claiming lucrative tax incentives.
Our recommendation is a team-oriented approach to support your commercial real estate clients in optimizing savings and bolstering cash flow as they transition towards energy-efficient buildings. Recognizing the enormity of this task, relying solely on an individual professional might not suffice. A well-rounded team should involve an independent party to aid in the design review and certify the property's energy efficiency performance.
KEY DISCUSSION POINTS WITH CLIENTS
To kickstart discussions with your CRE clients, it is beneficial to map out several key points that can guide them toward their energy efficiency goals:
- Build a strong business case to support the investment in energy efficiency.
- Initiate energy planning at the project's conceptual stage to maximize benefits.
- Be aware of varying enactment periods and qualifying criteria.
- Consider each client's unique tax structure and ability to absorb deductions.
- Explain the convergence of opportunities and integration of approaches for optimal results.
- Simplify the process with a turnkey solution to alleviate confusion.
- Leverage industry experts, products, and performance to enhance outcomes.
- Highlight the robustness of audit defense and warranty for added assurance.
- Emphasize that you have a dedicated team advocating for the client's needs and requirements.
To optimize the client's cash flow, assume the role of the expert team's quarterback. Explore possibilities within the existing legislation. The §179D tax deduction incentivizes building owners and design firms to adopt energy-efficient systems, curbing their carbon footprint. With energy costs escalating, this becomes a crucial focus for both public and private organizations.
COMMERCIAL BUILDING OWNERS
If you have invested in making your commercial buildings energy-efficient, you have the opportunity to deduct a significant portion or even all of the costs associated with the construction, installation, or retrofitting. This deduction can result in considerable savings for your business while also contributing to a greener future.
DESIGN FIRMS WORKING ON GOVERNMENT BUILDINGS
For design firms involved in energy-efficient commercial building projects situated on government-owned property, whether federal, state, local or a political subdivision, there's a special incentive. The government entity that owns the property can allocate the §179D deduction to the primary building designer. This creates a win-win situation, encouraging both energy efficiency and innovative design.
Identifying Eligible Buildings:
The scope of eligibility for EPACT §179D tax deductions is broad and includes various commercial property types such as apartments (4 stories or higher), auto dealerships, hotels, manufacturing facilities, offices, parking garages, shopping centers, and warehouses. Additionally, specific government buildings like courthouses, government offices, libraries, post offices, schools, state universities, and recreational buildings qualify as well.
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