IRS Clarifies Ability to Claim 179D Deductions as a Change in Accounting Method

Thoughtware Article Published: Oct 08, 2012
Tax planning and consulting services

In early September 2012, the IRS issued Revenue Procedure 2012-39 and clarified its position regarding design firms’ ability to claim Energy Efficient Commercial Building Property (EECBP), or Section 179D, deductions as a change in accounting method.

Section 179D allows as an immediate tax deduction up to $1.80 per square foot for the installation of EECBP, up to the cost of the qualifying property. EECBP placed in service between January 1, 2006, and December 31, 2013, is eligible for this deduction. This immediate deduction is in lieu of depreciating the property, generally over a 39-year period. Both new construction and retrofit projects may qualify. In addition, EECBP designers for governmental entities may qualify for a permanent tax deduction.

Generally speaking, EECBP must consist of interior lighting systems, heating, cooling, ventilation, hot water systems and the building envelope of a property, and the property must be located in the U.S. and subject to American Society of Heating, Refrigeration and Air-Conditioning Engineers (ASHRAE) Standard 90.1-2001. These systems must reduce the total energy and power costs of the building by 50 percent or more compared to a reference building meeting the standard’s minimum requirements. A partial deduction of 60 cents per square foot, limited by cost, may be available for any individually installed system that exceeds the standard by an applicable percentage based upon type of property. Our Insight from earlier this year offers a more complete discussion of Section 179D and the needed energy standards.

In January 2011, the IRS issued Revenue Procedure 2011-14, offering taxpayers the opportunity to catch up their past Section 179D benefits on their current-year income tax return by filing Form 3115, Application for Change in Accounting Method. While somewhat unclear, this seemed to allow EECBP designers for governmental entities the advantage of this new procedure.

In September 2012, the IRS clarified its position, stating that a designer that takes a Section 179D deduction is making a permanent change to its income. The designer is not otherwise entitled to a deduction for the amount of the Section 179D deduction by depreciation; permanent changes in income are not eligible for use of Form 3115.

However, designers that are allocated a Section 179D deduction for commercial building property placed in service in a prior taxable year may file an amended return for the taxable year in which the property was placed in service to claim the Section 179D deduction. Amended returns are available for “open” tax years; generally speaking, this means the prior three tax years.

If you need more information about 179D deductions, contact your BKD advisor.

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