Tax incentives like Section 179D and cost segregation studies can be impactful tax-saving tools for business owners. While each strategy offers distinct advantages individually, combining them can yield even more significant tax savings. Electing a Section 179D deduction and conducting a cost segregation study allows business owners to improve cash flow and optimize property investments. By strategically leveraging these tax incentives, business owners can enhance their financial position and drive greater profitability in the long run.
What are the Benefits of Electing Both?
Electing a Section 179D tax deduction and cost segregation study side-by-side can significantly reduce the net cost to business owners, speeding up the ROI payback timeframe.
Maximized Tax Savings: The Section 179D deduction allows immediate deductions of energy-efficient improvements, while a cost segregation study accelerates depreciation deductions by reclassifying certain assets to shorter recovery periods. Together, these strategies maximize tax deductions, significantly reducing taxable income and lowering tax liabilities.
Enhanced Cash Flow: Accelerated depreciation deductions generated through cost segregation provide upfront tax benefits, freeing up cash that can be reinvested into the business for growth initiatives, facility upgrades, or other strategic purposes. This enhanced cash flow can bolster financial flexibility and support long-term business objectives.
Optimized Property Investments: By identifying energy-efficient improvements eligible for the Section 179D deduction and maximizing depreciation deductions through cost segregation, business owners can enhance the overall return on investment for their facilities. These tax-saving strategies make commercial properties more attractive investments, potentially increasing property values and rental income while reducing operating costs.
Qualifying Projects for Both Section 179D and a Cost Segregation Study
Only specific projects will apply to both Section 179D and a cost segregation study. It is imperative to consult a specialty tax consultant to determine the eligibility of the project at hand. Projects that are eligible for both tax savings opportunities can look like:
- New construction
- Building additions
- Renovations
- Retrofits
Requirements for Section 179D
The Section 179D – Energy Efficient Commercial Building tax deduction allows business owners with commercial facilities to claim this powerful tax incentive for installing energy-efficient equipment. They can receive up to $5 per square foot on eligible buildings but must meet the following requirements:
- Building types must be commercial or high-rise residential buildings (four stories or higher).
- Projects must be completed on or after January 1, 2006.
- Energy-efficient systems must be HVAC and hot water systems, interior lighting systems, or building envelope systems.
Requirements for a Cost Segregation Study
Cost segregation is a tax planning tool that allows business owners to increase their cash flow by accelerating depreciation deductions and deferring federal and state income taxes. To receive a cost segregation study, business owners must comply with specific requirements and engage in a structured process.
- The business owner must own the commercial property. Eligible property can include office buildings, retail stores, warehouses, industrial facilities, single-family rental properties, multi-family residential properties, and more.
- Have sufficient taxable basis in the building to claim accelerated depreciation.
How to Determine Which Incentives You Can Claim
Partnering with an experienced firm specializing in tax incentives is vital in determining if you can pursue a cost segregation study, Section 179D deduction, or other real estate-related incentives. Calvetti Ferguson has a dedicated team of licensed Professional Engineers and CPAs with extensive experience in the rules and requirements for specialty tax incentives.
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