How to give clients enough information that they understand the value of the deduction without getting too deep into the weeds.
The Section 179D deduction for energy efficient construction and improvements to commercial buildings provides a great opportunity for commercial real estate owners to convert 39-year property into a deduction. Some clients will be perfectly happy to hear from you that a new election or credit will reduce their tax liability and that you are confident they can legally claim it on their return. Others, often newer clients or leads that you are trying to convert into clients, might want you to explain more about the opportunity in order to help them understand exactly what it is and how it relates to them. There’s always a fine line to walk with these folks, since they want to understand the value of what you’re doing for them but they don’t necessarily want to become experts on the topic.
A Trio of 3’s
The quickest way to remember the information that can help a client or potential client understand the value of Section 179D is the trio of 3’s:
- 3 Types of Construction Qualify:
- Interior lighting systems.
- HVAC systems.
- Building envelope systems.
- 3 Levels of Qualification:
- Level 1: To qualify for a $0.30-$0.60 deduction per square foot, an energy improvement must be made to the building’s interior lighting systems and improve energy use by 25%-40% or more. HVAC and building envelope improvements that meet the energy improvement threshold will qualify for $0.60 deduction per square foot.
- Level 2: To qualify for a $1.20 deduction per square foot, an energy improvement must be made in two of the three types and improve the energy use by an aggregate of 33 1/3% or more.
- Level 3: To qualify for a $1.80 deduction per square foot, an energy improvement must be made in all 3 types and improve the energy use by an aggregate of 50% or more.
- Not Just 3 Years of Amended Returns: The deduction is claimed via a change in accounting method for property owners, so it can be taken for construction or improvements as far back as 2006, the year the deduction was enacted.
With government buildings, these benefits go to the primary designer (architects, engineers, lighting designers) of the energy efficient improvement since the government cannot use tax deductions. However, the primary designer must amend prior year tax returns to claim the deduction. Examples of government owned buildings are as follows:
- Federal: offices, military bases, courthouses, post office, labs, etc.
- State: offices, transportation facilities, state universities, courthouses, etc.
- County, city, town, village, etc.: offices, schools, town halls, police, fire, libraries, airports, parking garages, etc.
One drawback to this deduction is that it is included in the package of tax rules commonly referred to as “extenders.” These provisions are not permanent. At this time, they have been extended through the end of 2014 and discussions are underway about extending them to the end of 2015 and beyond. So far, Congress and the President have found a way to extend this tax break every time it has neared expiration (or expired), but it’s hard to guarantee that will always be the case.
Support from a Strategic Partner
Given the engineering expertise needed to verify the energy improvement, most accounting firms seek out a strategic partner to provide the studies that make it possible for a real estate owner to take this deduction. One thing to look for when evaluating a strategic partner is the level of support that firm will provide to you in your efforts to market this service. It’s reasonable to expect that a qualified partner should be able to provide printed and electronic materials that will help you sell this service to your clients and contacts. It’s much easier to explain the value of the service when you work with a partner that focuses exclusively on these types of deductions.