Large Tax Refunds Await Unsuspecting Commercial Building Owners
September 1, 2010
By Ken Anno, Esq.
Founder & Managing Principal, CIC ENERGY CONSTRUCTION (Chicago General Contractor TGC 21344-1)
Founder & Principal, KUMA ENERGY SOLUTIONS
Association of Energy Engineers Member, NLB listed Lighting Designer & Qualified EPAct Certifier
The 2005 Energy Policy Act (EPAct) was the most significant overhaul of U.S. national energy policy since 1992. The policy’s objective was to reduce the national energy demand by 312 megawatts and carbon emissions by 10 million metric tons. Congress hoped to achieve these lofty goals by targeting commercial building owners by dangling a carrot in the form of $1.1 billion in tax-based incentives over 4 years (2005-2008) for improvements in sustainable building technologies, weatherization and energy efficiency.
The energy-efficient commercial-building property deduction (Section 179D) provides taxpayers with an immediate deduction of up to $1.80 per square foot for the installation of interior lighting, building envelope property, and heating, cooling, ventilation and hot water systems that significantly reduce power use. The cost of this property normally would be depreciated over 39 years. The use of accelerated depreciation techniques (rather than straight-line depreciation) increases the NPV of a project by shifting the cash flows forward in the project’s life thereby increasing present value of these cash flows.
“Energy-efficient property” is defined by EPAct 2005 to be commercial building property that is certified to reduce total annual energy and power costs to at least 50% less than a building satisfying ASHRAE 90.1-2001 Standard. Qualifying systems include 1) interior lighting systems, 2) heating, cooling, ventilation and hot water systems, and 3) building envelope. In addition, the property must 1) be otherwise depreciable property, 2) located in the United States, 3) paid to be constructed by the taxpayer seeking the deduction
The Emergency Economic Stabilization Act of 2008 extended the Section 179 tax deduction for the cost of energy efficient commercial building property placed into service during the taxable year. Under the extension, the property can be placed in service through December 31, 2013. This provision became effective for property placed in service after December 31, 2008 and before January 1, 2014. The 2008 extension further increased the amount of deductible Code Sec. 179 expensing to $250,000 from 125,000 and increased the phase-out threshold from $500,000 (adjusted for inflation) for reducing the deduction to $800,000 for property purchased and placed in service in tax years beginning in 2008. The 2009 Recovery Act further extended the $250,000 and $800,000 amounts to tax years beginning in 2009.
IRS NOTICE 2006-52 AND 2008-40
The IRS released interim guidelines pertaining to the deduction for energy-efficient commercial buildings under Section 179 (D). (See IRS Notice 2006-52, attached hereto as Exhibit A). IRS Notice 2006-52 was amplified by IRS Notice 2008-40, which set forth additional guidance relating to the deduction for energy efficient commercial buildings under Section179 (D) and is intended to be used in conjunction with Notice 2006-52.
THE RETROACTIVE SECTION 179 ELECTION DILEMA
Upon the 2008 extension, confusion has arisen over whether a Section 179 election could be made for qualifying property costs that were incurred over prior years when the tax payer did not know of the available tax deduction. In fact, the informational website www.section179.org specifically states that a taxpayer cannot claim Section 179 for previous tax years. However, this is simply incorrect.
The root of this confusion is that the permanent rule for elections to claim on expense method depreciation for many years has been that elections had to be made on the original income tax return for the year the property was placed in service (whether or not the return was timely) or on an amended return but only if filed within the time for filing a return (including extensions) for the taxable year. For taxable years beginning after 2002 and before 2008, a taxpayer was permitted to make an expense method depreciation election on an amended federal income tax return without the consent of the Commissioner. The amended return had to be filed within the time prescribed for filing an amended return for the taxable year. The statute has always been clear on the authority to revoke without the Commissioner’s consent
Any elections made under this Section, and any specification contained in such election, may not be revoked except with the consent of the Secretary. Any such election or specification with respect to any taxable year beginning after 2002 and before 2011 may be revoked by the taxpayer with respect to any property, and such revocation, once made, shall be irrevocable. §179 (c) (2).
The statute was amended in 2006 to extend the period for revocations to be made on an amended return before 2010, but that legislation did not extend the period for making elections on an amended return. The statute was amended again in 2007 to extend the date to “before 2011” for revocations without the Commissioner’s consent, but again without extending the period for making elections, which has led to confusion on the proper procedure on Section 179 election.
SECTION 179 TAX DEDUCTIONS CAN BE CLAIMED FOR PRIOR TAX YEARS BY FILING AN AMENDED TAX RETURN
A qualifying taxpayer can claim a tax deduction and refund by filing an amended tax return within 3 years from the date the original return was filed (including extensions) or within 2 years from the date the tax was paid. The IRS clearly authorizes a tax payer to make a Section 179 election for previous tax years as noted in the following IRS publications.
T.D. 9307: The Treasury had made an attempt to resolve the problem as evidenced in T.D. 9307 issued on December 26, 2006, which in revenant part stated:
The final regulations retain the rule contained in the temporary regulations providing that the making of a late depreciation election or the revocation of a timely valid depreciation election is not a change in method of accounting, except as otherwise provided by the Code, the regulations under the Code, or other guidance published in the Internal Revenue Bulletin. A commentator inquired whether a late Section 179 election may be made by requesting a change in method of accounting. Under Section 179 and the regulations under Section 179, a late Section 179 election generally is made by submitting a request for a letter ruling. However, for a taxable year beginning after 2002 and before 2010, a taxpayer may make a Section 179 election by filing an amended return. Accordingly, the IRS and Treasury Department have included a cross-reference to Section 179(c) and §1.179-5.).
Section 7 of IRS Rev. Proc. 2008-54 reiterated this point and expressly stated that the taxpayer could rely on this guidance even without a formal statutory amendment to Section 1.179-5(c).
For any taxable year beginning after 2007 and before the last year provided in § 179(c) (2) for revoking a § 179 election by a taxpayer with respect to any § 179 property, the taxpayer will be permitted to make a § 179 election without the Commissioner’s consent on an amended federal tax return for that taxable year. Currently, the last year provided in § 179(c) (2) is 2011. The Internal Revenue Service and the Treasury Department intend to amend § 1.179-5(c) to incorporate the guidance set forth under this Section 7. Until § 1.179-5(c) is amended, taxpayers may rely on the guidance set forth in this Section 7.
INFO 2009-0059: In INFO 2009-0059 released on March 27, 2009, the Office of Chief Counsel issued an Informational letter that stated that taxpayers can make or revoke an expense method depreciation (Sec. 179) election on an amended return for a taxable year beginning after 2007 and before 2011 without the need for Treasury Regulations to be issued. The IRS noted that taxpayers can rely on the guidance set forth in Rev. Proc. 2008-54, Section 7 for making and revoking such elections.
Section 7 of Rev. Proc. 2008-54 provides that for any taxable year beginning after 2007 and before the last year provided in Section 179(c) (2) for revoking a Section 179 election by a taxpayer with respect to any Section 179 property, the taxpayer will be permitted to make a Section 179 election without the Commissioner’s consent on an amended federal tax return for that taxable year. Further, Section 7 provides that the Internal Revenue Service and the Treasury Department intend to amend Section 1.179-5(c) to incorporate the guidance set forth under Section 7 and that until Section 1.179-5(c) is amended, taxpayers may rely on the guidance set forth in Section 7. See Section 7 of Rev. Proc. 2008-54.
CONCLUSION
Based on guidance issued by the IRS, a qualifying taxpayer is permitted to make a Section 179 election without the Commissioner’s consent on an amended federal tax return for a taxable year beginning after 2007 and before 2011 for energy efficient measures that meet the requirements set forth in IRS Notice 2006-52 and IRS Notice 2008-40. The simple translation is that building owners that meet the requirements as set forth above will enjoy additional cash flow in the form of a tax refund for project costs incurred within the past 3 years. To claim an unused 179D refund the taxpayer need only to file a Form 1040 X, “Amended U.S. Individual Income Tax Return.” A claim for a credit or refund must be filed within 3 years from the date the original return was filed (including extensions) or within 2 years from the date the tax was paid, whichever is later. According to Instructions for Form 1040X, the processing time is 8 to 12 weeks.
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