Epact 179D and 45L Building Energy Incentives Extended for 2017
On February 9, 2018 the President signed into law the Bipartisan Budget Act of 2018. The bill provides a one-year retroactive extension of Sections 179D and 45L energy tax incentives for certain property placed in service in 2017.
These provisions are to provide for incentive and cost recovery of the construction and installation of energy efficient property in buildings and parking structures. They are available for new construction as well as for the retrofit of existing buildings.
179D – Epact Energy Efficient Commercial Buildings Tax Deduction
- Applicable to nearly all types of commercial buildings, most parking structures and residential rental buildings greater than three stories
- Provides for a deduction of up to $1.80 per square foot for qualifying energy efficient property including HVAC and hot water, lighting and building envelope
- If building is owned by a taxpayer, benefit flows to the taxpayer
- If building is owned by a governmental entity, benefit flows to designer, which could include the architect, engineer, contractor and/or subcontractor
45L – Energy Efficient Homebuilder Tax Credit
- Applicable to single family homes as well as multifamily properties less than four stories
- Provides for a tax credit of up to $2,000 per unit
- Benefit flows to building owner or developer/contractor
If you have newly constructed or retrofitted a building recently please contact us and we can discuss the potential benefit and the process to maximize these tax incentives.
Focus on the TCJA: Depreciation and Section 179 Provisions
Bonus depreciation. Before the TCJA, taxpayers were allowed to deduct in the year that an asset was placed in service 50% of the cost of most new tangible property and certain other leasehold or building improvements.
- For property acquired prior to September 28, 2017 but placed in service from September 28, 2017 through December 31, 2017, 50% bonus depreciation generally applies. If the placed in service date is delayed until 2018, 40% bonus depreciation applies. The acquired language is generally a new provision because in the past bonus depreciation rules typically centered on when an asset was placed in service.
- For property acquired after September 27, 2017 (with no written binding contract for acquisition in effect on September 27, 2017) and placed in service between September 28, 2017 and December 31, 2022, the TCJA has raised the 50% rate to 100%. (Appropriately, 100% bonus depreciation is also called “full expensing” or “100% expensing.”)
- Additionally, under the TCJA the post-September 27, 2017 property eligible for bonus depreciation can be new or used. Under prior law, used property was rarely available for bonus depreciation.
- 100% depreciation is decreased to 80% for property placed in service in calendar year 2023, 60% in 2024, 40% in 2025, 20% in 2026 and 0% in 2027 and afterward (with phase down beginning a year later for certain private aircraft and long-production period property).
Code Sec. 179 expensing. Before the TCJA, most smaller taxpayers could elect, on an asset-by-asset basis, to immediately deduct the entire cost of section 179 property up to an annual limit of $500,000 adjusted for inflation. For assets placed in service in tax years that begin in 2018, the scheduled adjusted limit was $520,000. The annual limit was reduced by one dollar for every dollar that the cost of all section 179 property placed in service by the taxpayer during the tax year exceeded a $2-million inflation-adjusted threshold. For assets placed in service in tax years that begin in 2018, the scheduled threshold was $2,070,000.
- The TCJA substitutes as the annual dollar limit $1 million (inflation-adjusted for tax years beginning after 2018) and $2.5 million as the phase down threshold (similarly inflation adjusted).
- Before the TCJA, section 179 property included tangible personal property as well as non-customized computer software. The only buildings or other non-production-process land improvements that qualified did so because the taxpayer elected to treat “qualified real property” as section 179 property, for purposes of both the dollar limit and the phase down threshold. Qualified real property generally included 15-year qualified restaurant property, 15-year qualified leasehold improvement property, and 15-year qualified retail improvement property.
- For tax years beginning after 2017, qualified improvement property is newly eligible for 179 and includes (1) any building improvement other than elevators, escalators, building enlargements or changes to internal structural framework, and (2) building components that are roofs; heating, ventilation and air conditioning property; fire protection and alarm systems; or security systems.
- Also, for tax years beginning after 2017, items (for example, non-affixed appliances) used in connection with residential buildings (but not the buildings or improvements to them) are section 179 property.
Other rules for real property depreciation.
- If qualified improvement property is placed in service in 2017, it would be 39-year property but could be 50% or 100% bonus depreciation eligible depending on the acquisition date and the placed in service date. However, congressional intent was that if placed in service after 2017, qualified improvement property would be 15-year property and eligible for bonus depreciation. The final statutory language reads that it remains as 39-year property and is therefore not eligible for bonus depreciation. It is expected that Congress will address this in a technical corrections bill sometime in 2018.
- Apartment buildings and other residential rental buildings placed in service after 2017 generally continue to be depreciated over a 27.5-year period, but should the alternative depreciation system (ADS) apply to a building either under an election or because the building is subject to one of the conditions (for example, tax-exempt financing) that make ADS mandatory, the ADS depreciation period is reduced to 30 years instead of the pre-TCJA 40 years.
- If placed in service after 2017, 15-year qualified leasehold improvement property, 15-year qualified restaurant property, and 15-year qualified retail improvement property have all been eliminated.
- For tax years beginning after 2017, if a taxpayer in a real property trade or business “elects out” of the TCJA’s limits on business interest deductions, the taxpayer must depreciate all buildings and qualified improvement property under the ADS.
Vehicles. The TCJA triples the annual dollar caps on depreciation (and Code Sec. 179 expensing) of passenger automobiles and small vans and trucks. Also, because of the extension of bonus depreciation, the increase for vehicles allowed bonus depreciation of $8,000 in the otherwise-applicable first-year cap is extended through 2026 (with no phase-down).
Computers and peripheral equipment. Under the TCJA, computer or peripheral equipment placed in service after 2017 isn’t treated as “listed property” whether or not used in a business establishment (or home office) and whether or not, in the case of an employee, the use is for employer convenience. So an item no longer has to pass a more-than-50%-qualified-business-use test to be eligible for Code Sec. 179 expensing and to avoid mandatory use of the ADS.
Farm property. For items placed in service after 2017, the TCJA shortens the depreciation period for most farming equipment and machinery from seven years to five and allows many types of farm property to be depreciated under the 200% (instead of 150%) declining balance method. For tax years beginning after 2017, if a taxpayer elects to not subject a farming business to the TCJA’s limits on business interest deductions, the taxpayer must depreciate under the ADS the business’s buildings and other assets that have a depreciation period of 10 years or more.
Alternative minimum tax. Property eligible for bonus depreciation continues to be exempt from the unfavorable depreciation adjustments that apply under the AMT. However, the corporate AMT has been repealed; accordingly the election that corporations could make to give up bonus and other accelerated depreciation for bonus-depreciation-eligible property in exchange for a refund of otherwise-deferred AMT credits was eliminated.