CATCH UP ON MISSED TAX DEDUCTIONS WITH FORM 3115 “Change in Method of Accounting”

Two of the ways building owners can benefit from energy efficiency projects are by performing a cost segregation study and qualifying for deductions under §179D of  the Energy Policy Act of 2005.  A cost segregation study identifies and reclassifies personal property assets to shorten the depreciation time for taxation purposes, which reduces current income tax obligations. Personal property assets include a building’s non-structural elements, exterior land improvements and indirect construction costs.  Depreciation expense is accelerated and tax payments are decreased when an asset’s life is shortened, which frees up cash for investment in energy efficiency projects.

§179D includes full and partial tax deductions for investments in energy efficient commercial buildings that are designed to increase the efficiency of energy-consuming functions.  The deduction available is up to $.60 per square foot for lighting, HVAC and building envelope, creating potential for $1.80 per square foot if all three components/subsystems qualify. These deductions are applicable to buildings that were either built or retrofitted after December 31, 2005.  In order to qualify for the deduction, the taxpayer must receive a third party energy efficiency certification.

For taxpayers who haven’t claimed these deductions, completing a “Change in Method of Accounting” IRS Form 3115 allows private sector building owners to go back to “closed” tax years to January 1, 2006 to “catch up” and claim any missed deductions. No tax return amendment is necessary.  This means that a taxpayer could potentially claim deductions from 2006-2012 all on one return and significantly reduce their tax burden, if not eliminate it altogether which could recoup the cost of funding energy efficiency.

Primary designers of government buildings also have the option of going back to “open” taxes or three years from date of filing to amend a tax return, which may result in an IRS refund for overpayment of taxes with interest.  A new ruling by the IRS states that Primary designers MUST file an amended return to claim the deduction for open years and may not file Form 3115 “Change of Accounting” form to claim the deductions.