Don’t miss out on these tax breaks for the 2021 tax year

When we turn our calendars to 2022, some tax deductions and credits will expire or change. Here’s a review of ones to take advantage of if you qualify.

1. Cost segregation study

A cost segregation study provides an in-depth, engineering-based analysis of the costs associated with the acquisition, construction or renovation of a building. A taxpayer should hire a professional to conduct a cost segregation study on a new building or on an older building that has been renovated.

A cost segregation study will analyze costs in order to determine the appropriate asset class lives. 

A properly done study results in additional depreciation deductions and can accelerate depreciation, increase current tax deductions, defer income tax and increase cash flow. Even if the building was purchased, constructed or expanded in a prior year, a cost segregation study and a simple change in accounting method can allow the taxpayer to claim the depreciation deductions of prior years without having to amend prior-year tax returns.

Bonus depreciation is 100% in 2021, which means all qualifying short-life assets can be depreciated during the first year of ownership. It shifts to 80% in 2022 and continues to 0% in 2026. Eligible properties include new acquisitions, construction or improvements.    

2. Commercial buildings energy efficiency

A 179D tax deduction is available for owners who install qualifying energy efficient systems in their buildings. Owners may deduct up to $1.80 per square foot if they install interior lighting, building envelope, or heating, cooling, ventilation or hot water systems that reduce energy costs by 50% or more, the U.S. Department of Energy reports. Each component is allowed a deduction of 60 cents per square foot.

This deduction will increase annually, starting in 2021 to account for inflation. In addition, the energy efficiency criteria have been made more stringent to use the most recent version of the ASHRAE Standard 90.1. 179D was recently made permanent so it will not expire.

With 179D, it is important to note:

• A designer of energy efficient systems to government owned buildings are eligible for qualifying energy efficient deductions. The government entity can assign their deduction to the designer.
• Owners can go back to 2006 to claim missed benefits. In many situations, they will not need to amend their tax returns and file a Form 3115 to claim missed deductions.
• With this new law, taxpayers will need to utilize the ASHRAE standard in effect two years prior to the date of construction.
• Taxpayers must have an unrelated party certify the deduction.

While 179D was recently made permanent, there are proposed regulations that could alter deductions, who qualifies and/or bonus depreciation beyond 2021 plus the threshold for eligibility, so the specific details could change soon or in the future.

3. Energy efficient home credit

This 45L credit is worth $2,000 per unit to developments with energy levels that meet certain standards below the national average. Dwellings including senior living, apartments and multi- or single-family homes are eligible. The residential property must be three stories or less above grade. The credit applies to units owned, sold or leased by the taxpayer in 2021. The credit is extended through 2021 but is not permanent.

With 45L, it is important to note:

• The credit amount must be supported by a qualified third-party energy analysis.
• Taxpayers can amend tax returns in order to claim these tax credits.

How Wipfli can help

Maximize your investment in people, process and capital by securing credits and incentives with Wipfli’s proven tax team. Our tax specialists monitor changes in tax laws to stay up to date on eligibility requirements and the process for obtaining tax credits and incentives. With our extensive experience, we can help your business identify, leverage and maximize applicable credits and incentives. Learn more on our tax credits and incentives services web page.