A Few Indicators Will Tell You If Their Deduction Will Be Worth the Cost of the Study
We spend a lot of time talking with CPA firms about section 179D and cost segregation studies. It’s a pretty great job to help accountants and their clients uncover substantial tax savings that they didn’t know were available or didn’t know how to claim. At the same time, we have to remind the folks that we talk with not to get too far ahead of themselves. It’s important to remember that the potential 179D deduction must be large enough to justify the cost of the study needed to claim it. Here are a few questions you can ask to determine if a client is in line for tax savings that warrant a study.
What type of improvements were made? Section 179D applies to energy efficient improvements made in 3 different categories:How big is the space? The deduction is calculated based on the square footage of the structure improved, so smaller spaces may not justify the cost of the study. Typically, 30,000 sq. ft. seems to be the threshold at which most Section 179D deductions exceed the cost of the calculation.
- “Envelope,” which includes improvements to the shell of the building that make it more efficient, such as windows, roof, etc.
How much did the work cost? The deduction is also limited to the amount spent on the improvements. It’s important to check the receipts before committing to the study in order to make sure that the potential deduction is large enough.
What are the energy efficiency ratings of the old materials removed and the new materials installed? The licensed engineer or contractor who reviews the improvements will make a determination based on the improvement in energy efficiency. The business needs to have enough information about the old and new materials to support that calculation.
The questions above apply to commercial property owners who have made or are considering making energy-efficient improvements to their properties. If you have a client or potential client that is an engineering or architectural firm, there’s a different question to ask that could uncover significant opportunities.
Do you serve government clients? If a government makes an energy efficient improvement to a building, it won’t have much use for a 179D deduction. However, the law provides some opportunities for an engineering or architectural firm that designs the energy efficient improvements to a government building to claim the deduction. If your firm serves these professionals, or if it would like to expand into this segment of the market, this is a great question to ask.
As an accountant, you know better than most how to help a business evaluate the potential costs and benefits of any particular decision. When it comes to performing a cost segregation and claiming a section 179D deduction, these questions should help you make that evaluation quickly and accurately.