With the arrival of spring, a commercial real estate owner, developer or
investor’s fancy naturally turns to thoughts of taxes — or, more specifically,
how to reduce their company’s tax burden.
And yet they might be overlooking opportunities to benefit from tax
incentives for businesses that could save them millions of dollars. Across all
business types, an estimated 60% to 80% of U.S. companies do not take
advantage of these tools to the fullest extent.
In the CRE world, these include the 179D Energy-Efficient Commercial
Buildings Deduction and the 45L Energy-Efficient Home Credit. Sometimes
used in tandem with cost segregation studies to accelerate depreciation,
these tax incentives can help a business free up capital, enhance cash flow and
maintain long-term financial stability, according to ABGi, a global tax
consultant specializing in tax incentives for businesses.
“Many CRE companies fail to take full advantage of these important tools due
to a lack of awareness or capacity, or because they fear the complexity of the
process or the risk of audits,” said Matt Foley, an engineering manager and
specialist in real estate tax incentives with ABGi USA. “These concerns are
overblown if the company works with a knowledgeable tax advisor, and with
shifting tax laws it’s more important than ever to maximize their use of
available incentives.”
Bisnow spoke with three ABGi tax experts about how these tools work and
how they can benefit CRE firms as well as the firm’s approach to performing
tax planning for developers.
45L Credit: ‘Money In Your Pocket’
The 45L Credit applies to residential construction and is of particular interest
to multifamily projects as the amount of credit available is on a per-unit basis.
But its use is not limited to ground-up projects.
An owner of an existing building can use the credit when the property is being
thoroughly renovated from non-residential to residential use, Foley said. At a
time when many office buildings remain underoccupied, the multifamily tax
credit could benefit an owner trying to make a conversion pencil.
45L At A Glance
— Benefits multifamily developers and builders, and buildings
completed in 2021 or later
— Allows credits of up to $5K per unit
— Applies to energy-efficient HVAC systems, high-performance
building envelopes and energy-efficient lighting and appliances
Source: ABGi
Whether the project is new construction or a conversion, Foley said 45L offers
the potential of “more money in your pocket.” The tax credit, perhaps
combined with other factors, could be enough to make a deal pencil, he said.
To fully benefit from 45L, ABGi advises CRE owners to work with a qualified
tax adviser early in the process before the structure is constructed or
converted. That way, ABGi can make a more confident judgment as to whether
a building qualifies for the credit.
“We like to get our foot in the door at the design phase,” Foley said. “That
allows us to determine, for example, that if you add an extra inch of insulation
it will make the difference in qualifying for a half-million dollar credit.”
179D Deduction: ‘Extremely Lucrative’ Benefits
As another important tool for tax savings, 179D is not solely a tax deduction
for building owners and developers — it can also benefit design consultants,
but only when the building is owned by a government, nonprofit or tribal
entity.
ABGi's recent projects include a 2M SF commercial building that it helped
obtain the highest deduction rate possible. On another project, ABGi's experts
worked with the building’s mechanical and electrical engineers to deliver
$12M in deductions in tax years 2022-2024.
“179D is an extremely lucrative benefit for a lot of folks,” said Kris Huffman,
an ABGi senior project manager and associate director.
In total last year, he said ABGi reduced clients’ taxable income by
approximately $60M through 179D, which can apply to multifamily buildings
of four or more stories. Owners are eligible for the deduction, but 179D can
also benefit design teams working on government-owned buildings since they
are the ones who create energy-efficiency specifications for a project.
179D At A Glance
— Benefits architects, engineers and contractors on public,
nonprofit and tribal projects completed in 2021 or later, and
commercial building owners making energy-efficient
improvements to properties completed in 2005 and later
— Allows deductions of up to $5 per SF
— Applies to HVAC and hot water systems, building envelope and
interior lighting
Source: ABGi
Under 179D, ABGi performs two energy models of a building, including a site
visit so that it can verify to the IRS that the energy efficiency measures were
applied to the building’s construction. It then compares the two models, and if
the difference reaches a certain threshold of energy cost savings, the building
is eligible for a deduction of a certain dollar amount per square foot.
Although 179D can trace its roots back to the Energy Policy Act of 2005,
Huffman said not enough commercial building owners benefit from it.
“They may have never heard of 179D or understand how they can take
advantage of it,” he said. “But if I owned a building, I would 100% go after it to
reclaim some of my investment in tax savings.”
Huffman added that the 179D process should not take up a lot of a client’s
time if they work with an experienced tax professional. ABGi typically requires
no more than a couple of hours of their time if they provide all the necessary
documentation.
“We want it to take as little of their time as possible because they're paying us
to do this work while they concentrate on their business,” he said. “I tell
them that they will hear from me periodically but I will not overload their
inboxes with unnecessary correspondence.”
Cost Segregation: Why Experience Matters
To fully benefit from a tax reduction tool, commercial building owners should
seek the help of an adviser early in a project’s life cycle.
“They need to work with a firm whose people are experienced and know what
they’re doing,” said Damien Gallow, ABGi director of cost segregation. “That's
important in doing cost segregation because you need to understand the tax
law as well as accounting, engineering and real estate.”
Cost segregation allows a building owner to accelerate the depreciation of
building components, he said. Rather than waiting 39 years for the
depreciation, an experienced adviser can help reduce the depreciation on
components to only five, seven or 15 years.
One ABGi client realized more than $1M in savings in a single year through
depreciation. It then applied that money to expand its real estate portfolio and
increase its headcount.
None of that could have been achieved without the assistance of an
experienced partner.
“They need to work with someone with an engineering background, which is
an IRS stipulation,” Gallow said. “A lot of accounting firms don't have cost
segregation or other special expertise in-house. They'll refer their clients to a
tax specialty services firm like ours.”
This article was produced in collaboration between ABGi and Studio B.
Bisnow news staff was not involved in the production of this content.
Studio B is Bisnow’s in-house content and design studio. To learn more about
how Studio B can help your team, reach out to studio@bisnow.com.