If you are considering making improvements to a commercial building, there are various tax strategies that may apply to your particular situation. One of these is abandonment, which allows the taxpayer to reduce the tax burden when replacing assets that exist within a building. So, if your green building strategy includes replacing metal halide lighting or your HVAC system, you may be able to take advantage of an abandonment tax deduction.
Individual assets being replaced may qualify for abandonment if they were never identified or segregated in the accounting records of the business when the building was purchased or constructed. If the books reflect just the large asset, such as “Building”, this means that the value of each individual asset is included in the value of the building. Typically, the “Building” is being depreciated over 27.5 years for commercial residential or 39 years for commercial property. These individual assets do have a value of their own, and when the time comes to replace them a tax deduction should be taken for all remaining value associated with those assets. If no specific value was assigned to your HVAC system or metal halide lighting, a qualified advisor may be able to determine the remaining value at the time of replacement, allowing for a deduction which will help defray the cost of the new equipment.
An abandonment study can determine whether a deduction can be taken, as well as identifying the value of the assets being replaced. Metal halide lamps are commonly used around manufacturing and industrial buildings. They do have a finite life span, and information such as the make and model will help determine the value at the time of replacement. Additional information needed would be the date the lighting was installed, the date of service, or the date of purchase for new construction. Abandonment may also apply to HVAC assets in your building. When looking at replacing assets in the building, it should be noted that in order to qualify for abandonment, the assets must be discarded so that they cannot be sold or used again.
Working with advisors who understand tax strategies such as abandonment, cost segregation and various energy efficiency tax deductions that are available to qualified businesses ensures that your improvements are made as part of a holistic business strategy that takes full advantage of benefits available to you and saves money on capital expenditures.