IRS Revenue Procedure 2011-14, just released, now makes it possible to take tax deductions under section 179D (energy efficient building property) by way of an automatic “change of accounting” method instead of amending prior tax returns. Previously, taxpayers could only enjoy the benefits of the Energy Policy Act by amending tax returns. This also makes it possible that a taxpayer could reach back and get deductions as far back as the 2006 tax year.Although the IRS does not always make accounting easier when it issues new revenue procedures, it appears that they have handed a huge win to all taxpayers who can claim tax deductions under 179D. If you don’t understand why this is great news, read on.
Under the standing interpretation of the Energy Policy Act tax before this Revenue Procedure, taxpayers wishing to take this tax deduction for qualifying energy efficient commercial buildings had to either take the deduction in the current tax year (if they were able to qualify their deductions in time for tax filings) or, if they wanted to take the deduction for properties placed in service in prior tax years, they would need to amend their tax returns for those prior years. Worse, the accounting rules for taking this type of deduction only allow taxpayers to amend a return within three years.As set forth in more detail in my article about the basics of the Energy Policy Act (link), a 179D tax deduction is available for a qualifying energy efficient commercial building in the year which includes the date on which the building was placed in service.Example: Owner designs a building beginning in 2004. The building is constructed during 2005 and 2006. On December 22, 2006, the building opens pursuant to a validly issued C.O. On January 24, 2007, the building obtains a final C.O.
Note that in the example, the “in service date” is 2006, not 2007, because the “in service” date and not the final C.O. date (typically) governs the tax year in which a taxpayer can take the tax deduction.
The net effect is that (1) a taxpayer currently desiring to take a tax deduction for the example building would need to amend the 2006 tax return to obtain the benefit (expensive, burdensome) and (2) the taxpayer would be precluded from taking the deduction for this building because more than 3 years have elapsed since the 2006 return would have been filed (missed opportunity altogether).
Enter Rev. Proc. 2011-14. This express guidance from the IRS tells us (among many other things) that instead of having to amend a prior return (you still can, by the way), you can instead change your accounting method. What that means is that you don’t have to amend a prior return. You can adjust the current year’s income and expense using the “change of accounting” and make the adjustments on your current tax return. To wit, section 8.04 of the revenue procedure, entitled “Elective Expensing Provisions” provides:
.04 Deduction for Energy Efficient Commercial Buildings (§ 179D)(1) Description of Change. . . . The deduction for energy efficient commercial building property must be claimed in the taxable year in which the property is placed in service and is subject to the limits of §179D(b). The basis of the energy efficient commercial building property is reduced by the amount of the § 179D deduction taken and the remaining basis of the energy efficient commercial building property is depreciated over its recovery period.(2) Applicability. This change applies to:
(a) energy efficient commercial building property that is installed on or in any building that is located in the United States and is within the scope of ANSI/ASHRAE/IESNA Standard 90.1-2001, Energy Standard for Buildings Except Low- Rise Residential Buildings, developed for the American National Standards Institute by the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America (as in effect on April 2, 2003, including addenda 90.1a-2003, 90.1b-2002, 90.1c-2002, 90.1d-2002, and 90.1k-2002 as in effect on that date) (Standard 90.1-2001);
(b) energy efficient commercial building property that is installed as part of the interior lighting systems; the heating, cooling, ventilation, and hot water systems; or the building envelope of a commercial building; and
(c) it is certified that the interior lighting systems, heating, cooling, ventilation, and hot water systems, or the building envelope that have been incorporated into the building, or that the taxpayer plans to incorporate into the building subsequent to the installation of such property, will reduce the total annual energy and power costs with respect to combined usage of the building’s heating, cooling, ventilation, hot water, and interior lighting systems by 50 percent or more as compared to a Reference Building that meets the minimum requirements of Standard 90.1-2001.
(3) Manner of making change. A taxpayer making this change must attach a statement with a detailed description of the tax treatment of the property under the taxpayer’s present and proposed methods of accounting.
(4) Additional filing requirement. In addition to the statement required by section 8.04(3) of the APPENDIX of this revenue procedure, a taxpayer making this change must attach a certification as required by section 4 of Notice 2006-52, 2006-1 C.B. 1175, and section 5 of Notice 2008-40, 2008-14 I.R.B. 725, to demonstrate the energy efficient commercial building property has achieved the reduction energy and energy efficient commercial building property has achieved the reduction energy and power costs to qualify for the § 179D deduction. In the case of a publicly owned building for which a designer has been allocated a deduction under § 179D, the designer becomes the taxpayer for purposes of the deduction and must attach a certification as required by Notice 2006-52 and Notice 2008-40, and an allocation from the owner of the building to the designer as required by section 3.04 of Notice 2008-40.
(5) No audit protection. A taxpayer does not receive audit protection under section 7 of this revenue procedure in connection with this change.
(6) Designated automatic accounting method change number. The designated automatic accounting method change number for a change in method of accounting under this section 8.04 of the APPENDIX is “152.” See section 6.02(4) of this revenue procedure.
Whether the Revenue Procedure makes it possible for you to make adjustments to prior year’s tax deductions (2006 for example) is something you should consult your tax professional about. Many factors are involved and the Revenue Procedure on the whole, is a rather complex document involving a myriad of issues affecting tax basis, accounting methods and multiple income and expense issues in addition to just 179D.
With that disclaimer aside, you should definitely take this opportunity to consult your CPA or other tax advisor to make sure that your company is not missing out on tax deductions now made more readily available through these new change in accounting rules.
Tax Advisors, read on for even more detail . . .
What is a Change of Accounting?
(1) Section 1.446-1(e)(2)(ii)(a) provides that a change in method of accounting includes a change in the overall plan of accounting for gross income or deductions, or a change in the treatment of any material item. A material item is any item that involves the proper time for the inclusion of the item in income or the taking of the item as a deduction. In determining whether a taxpayer’s accounting practice for an item involves timing, generally the relevant question is whether the practice permanently changes the amount of the taxpayer’s lifetime income. If the practice does not permanently affect the taxpayer’s lifetime income, but does or could change the taxable year in which income is reported, it involves timing and is therefore a method of accounting. See Rev. Proc. 91-31, 1991-1 C.B. 566.(2) Although a method of accounting may exist under this definition without a pattern of consistent treatment of an item, a method of accounting is not adopted in most instances without consistent treatment. The treatment of a material item in the same way in determining the gross income or deductions in two or more consecutively filed federal income tax returns (without regard to any change in status of the method as permissible or impermissible) represents consistent treatment of that item for purposes of § 1.446-1(e)(2)(ii)(a). If a taxpayer treats an item properly in the first return that reflects the item, however, it is not necessary for the taxpayer to treat the item
consistently in two or more consecutive returns to have adopted a method of accounting. If a taxpayer has adopted a method of accounting under these rules, the taxpayer may not change the method by amending its prior income tax return(s). See Rev. Rul. 90-38, 1990-1 C.B. 57.One of the interesting issues raised by CPA’s I’ve discussed the “change of accounting” issue with in more detail over the past several weeks is whether all buildings on which you’re taking 179D deductions will constitute one “item” or if it will be on a building by building basis.
The accounting method regulations under §1.446 consider the accounting of an “item” as an accounting method. The new Rev. Proc. has identified the §179D deduction an item for §1.446 purposes. One of the murky areas in application of the new Rev. Proc. is how the § 179D item looks as an “item” for purposes of §446. How you define it may affect how you apply the accounting method rules.
For instance, fragmentation of an accounting item into multiple items may lead to multiple methods of accounting. A good example is the treatment of capitalized assets for depreciation purposes. A taxpayer may elect to have a different method, period of recovery, or convention for specific assets or classes of assets subject to certain rules. The accounting item may be the individual asset or the class depending on the elections and applicable rules.
In the 179D context, the Rev. Proc. begs the question: Should each individual building be viewed as a separate item of accounting for purposes of the § 179D deduction (i.e. similar to elections made for specific depreciable assets)? Or alternatively, should all qualifying buildings be viewed in the aggregate as a single item of accounting for purposes of § 179D?
If each individual building is viewed as a separate item of accounting for the § 179D deduction, then each building (or contiguously grouped buildings) might have a separate method of accounting. In this case, the § 179D accounting method would be applied on a building-by building-basis (each building being the identifier of the accounting item). An accounting method change would not be applicable for buildings where § 179D was previously taken because no change is required. For a specific qualifying building where no §179D deduction has been previously taken, the taxpayer may adopt a new method of accounting using § 179D for that particular building. In doing so, it would seem appropriate that the taxpayer would consider cumulative allowable §179D deductions for that particular building (including closed years) in computing his negative §481(a) adjustment.
If all qualifying buildings were viewed as a single item for accounting method purposes, then the §179D accounting method would be applied on an aggregate to all qualifying buildings. If a taxpayer has already taken a §179D deduction on any building, then he has essentially adopted §179D for all buildings and no accounting method change would be allowable (closed years not available). If the taxpayer has never taken a §179D deduction on any building, then the adoption of §179D by the taxpayer would be for all qualifying buildings. In computing the negative §481(a) adjustment, it would seem appropriate that the taxpayer would consider cumulative allowable §179D deductions for all qualifying buildings (including closed years).
Viewing §179D on a building-by-building basis may seem like the more logical position when viewed with the established guidance available for depreciation methods. But the IRS has not provided additional guidance on that issue.
This article is written by John Cummings, National Director Business Development (NY and NJ), Engineered Tax Services. PH: 561.254.9185.