System and Organization Controls (SOC) report

Lenders are frequently involved early on in building projects for commercial or residential real estate.  Certain building projects could be eligible for tax credits or other incentives.  Lending agents that are familiar with these tax credits and incentives and are able to recognize when they may apply can provide significant value to the borrower.  This article summarizes the most common tax credits and incentives for building projects and how to recognize when they may apply. 

Energy Efficient Commercial Building Deduction, §179D

For income taxes, new commercial buildings are depreciated and deducted over 39 years.  Taxpayers may accelerate costs related to interior lighting systems; heating, cooling, ventilation, and hot water systems; or the building envelope of a commercial building designed to reduce energy consumption by 50% or more in comparison to a reference building.

Commercial reference buildings for new construction are defined by the U.S. Department of Energy (DOE) and are organized by building type and location.

The amount of the §179D deduction in a given year is a function of the statutory amount, the square footage of the building, and the aggregate amount of the deduction from earlier years.  The statutory amount is adjusted for inflation.  The §179D deduction reduces the taxpayer’s basis in the building.

Lenders that finance new commercial building projects with special provisions for energy-efficient costs should refer the borrower to a tax professional to explore eligibility for IRC Section 179D deductions.

New Energy Efficient Home Credit, §45L

The New Energy Efficient Home Credit is available to contractors for qualified dwelling units completed between 2006 and 2021.  Although the credit is currently expired, there is a possibility it will be renewed again in 2022.  The credit is for low-rise residential (3 stories or less) and includes not only homes but also apartment buildings that meet the following criteria

Qualified dwelling units must be located in the United States and must be certified to meet energy-saving requirements for annual heating and cooling of either a 30% or 50% reduction in energy usage.  

The amount of the credit is generally $2,000 for a new home or apartment with a 50% reduction and $1,000 for a new home with a 30% reduction.  Similar to §179D, credits claimed reduce the taxpayer’s basis in the home.

Lenders that work with either small contractors on speculation homes or large contractors on large-scale residential developments should refer the contractor to a tax professional to explore eligibility for IRC Section 45L credits for 2021 and possibly 2022 if the credit is renewed.

Cost Segregation Studies

Cost segregation studies allow the taxpayer to separate building costs into classes that are eligible for accelerated depreciation through Section 168(k), bonus depreciation, or through Section 179, election to immediately expense.  A taxpayer that purchases a building, either new or used, can accelerate the depreciation and deduction of the building by separating plumbing, electrical, or other fixtures from the building systems.  These studies generally rely on engineering plans and other building records to classify some of the building’s costs into shorter lives.

Certain building types have more costs that can be accelerated than other building types.  For example, office buildings generally have more costs that can be accelerated compared to warehouses.  Lenders financing an office building, or similar spaces, should refer the borrower to a tax professional to explore a cost segregation study on the building. 

In partnership with McGuire Sponsel, Anderson ZurMuehlen combines the expertise in tax law with a thorough understanding of the industries we serve to maximize benefits and reduce the tax burden. There are numerous ways to get benefit from a study of fixed assets. Our team can evaluate your unique needs and discuss options for finding maximum value through a study. 

This article was written by Steven Johnson, CPA and Shareholder in the Anderson ZurMuehlen office, and Craig Wilhout of the Atlanta, Georgia location of McGuire Sponsel.

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