Catch Up on Missed Energy Tax DeductionsJune 14, 2016
Description: Do you qualify for the energy tax deduction? Has it been more than a year since your property was put in service? There’s a catch-up option for you.
In a previous blog, “‘Going Green’: The Section 179D Federal Energy Tax Deduction,” we discussed the benefits of the often-overlooked federal tax deduction for energy-efficient commercial buildings. This deduction allows commercial building owners and lessees who install certified energy-efficient systems to immediately expense as much as $1.80 per square foot in costs, rather than capitalize the improvements and depreciate them over time.
Owners of government buildings may allocate the deduction to a project’s “designer.” This individual is typically an architect, engineer, contractor, environmental consultant or environmental services provider. The Sec. 179D deduction is available for qualifying property placed in service between January 1, 2006, and December 31, 2016.
Two Options for Missed Deductions
Ordinarily, the deduction is taken in the year an energy-efficient installation is placed in service. But what if you discover that property installed in a previous tax year qualifies for the deduction? You have two options: 1) Claim the deduction on an amended return for the tax year the property was placed in service, or 2) claim a “catch-up” deduction on your next return by filing Form 3115, “Application for Change in Accounting Method.” (Important note: The second option isn’t available to designers.)
Pros of Using the Catch-Up Option
The advantage of a catch-up deduction is that it avoids the three-year statute of limitations for filing amended returns. Conceivably, this allows you to claim all missed deductions from 2006 through 2016 on one return (provided the property hasn’t already been fully depreciated). This option can substantially reduce your tax burden in the current year.
The catch-up approach makes it possible to claim deductions for previous tax years, even if it’s too late to file an amended return. It also allows you to capture missed deductions for “open” tax years without the need to prepare an amended return.
Not for Everyone
Depending on your circumstances, however, you may achieve greater tax benefits by amending returns from open years (the first option listed above). This might be the case, for example, if you were in a higher tax bracket in the year energy-efficient property was installed. An amended return allows the deduction to offset income that’s taxed at a higher rate than income in the current year, resulting in greater tax savings.
Let us know if you installed qualifying energy-efficient systems in previous years but failed to take advantage of the Sec. 179D deduction. We can review your situation and determine the optimal strategy to lower your tax burden.