Are You Still Depreciating Non-Existent Assets?
When you undertake demolition or renovate a building to tear out lighting, HVAC units, and other components, they are abandoned or retired from the building. As such, their book value can be treated as a business deduction. The tangible personal property within the structure (or a part of it) allows for the remaining depreciable value (or basis) to be written off when the asset is retired, provided the personal property is no longer in service and was not purchased with the intent to demolish. This must be identified and valued prior to demolition.
Important: Consider these tax strategies before any demolition and/or renovation is completed or you may lose this opportunity.
When you re-light a building, you create both an opportunity for the Energy Tax Deductions and a Disposition Study. Excess lighting (eliminated with the new energy-efficient system) can be depreciated faster than the typical 39 years; therefore, you maximize your tax strategies and save money.
Why Can You Take Asset Disposition?
Recent changes to tax regulations have allowed us to dispose of individual building components where previously the IRS viewed a building as a single unit of property (UOP). The new regulations as issued in IRS Code 1.168(i)-8 allows a property owner to dispose of a smaller UOP provided that a detailed cost segregation report has properly broken down individualized UOP within the larger unit. The IRS now required property owners to depreciate 9 separate units of property within their real property:
- Building Structure (including only walls, windows, doors, concrete & Roof)
- HVAC System(s)
- Plumbing System
- Electrical System
- Fire Suppression & Alarm
- Gas Distributions System
*and any other system identified in future published guidance
What Can Be Disposed Of?
These UOPs may include lighting systems, HVAC systems or components, or building envelope components. ETS is the only firm that has always broken down the smaller units within the property regardless of depreciable class-life. What this means is that property owners who are eligible for energy deductions such as 179D can substantially increase the benefit by including this abandonment in the current year.
When assets are retired or removed, they are taken off a company’s books (when you re-light a facility, you essentially remove the old lighting). ETS enables you to calculate the value of these retired assets and provides all of the necessary documentation needed to claim these tax deductions. ETS is unique in this regard. We provide Cost Segregation as well as EPAct studies which greatly increase the benefits over an individual report. It is our unique blend of these services that allows you and your clients to take advantage of these deductions.
Case Study: 250,000 square foot Warehouse – Lighting Retrofit
|179D Energy Tax Deduction ($0.60sf)||$150,000|
|Disposition of Existing Lighting System||$90,000|
|Annual Energy Savings with New Efficient System||$60,000|
|Total Tax Deduction||$240,000|
|Cash Benefit Based on 35% Tax Rate||$84,000|
|Out of Pocket Expense for Retrofit||$116,000|
| Estimated Return on Investment Including Incentives ||Approx. |
|Estimated Return on Investment without Incentives|| Approx. |
To learn more about Disposition studies, contact us at 561-253-6640 or email us here.
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