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The deduction is allocated to three separate building components as follows:
- $.60 is allowed for HVAC systems that achieve 15% savings;
- $.60 is allowed for lighting systems achieving 25% savings; and
- $.60 is allowed for building envelope systems that achieve 10% savings.
Dealers who are building or making substantial improvements to their real estate should consider incorporating energy-efficient components in their projects to harvest additional tax benefits. It is worth noting that the 179D deduction had previously sunset at 12/31/2017 and is now available through 12/31/2020. This means that a dealer who had a building project in 2018 and 2019 can go back into prior years and apply the 179D concepts to get tax benefits. To qualify for 179D benefits, an independent, third party firm is required to review and certify that each of the business components meet or exceeds the required standards.
Cost Segregation Studies
Simply stated, a cost segregation study is a formal process performed by engineers to identify and segregate building costs or purchase price of real estate that would otherwise be depreciated over 27 ½ or 39 years. Individual components of the project/real estate are identified and classified based on their use, purpose, service and/or physical characteristics. This process allows the engineer to determine which components are identified as personal property defined by IRC Section 1245 and which components are identified as real property defined by IRC Section 1250. The powerful tax benefit is being able to accelerate depreciation of the Section 1245 components by electing bonus depreciation. Currently 100% bonus depreciation is available for assets placed into service through 2022 and then decreases to 80% in 2023, 60% in 2024, 40% in 2025 and 20% in 2026. There has never been a better time than now to utilize cost segregations studies in parallel with bonus depreciation to minimize income taxes. Dealers who are purchasing or building real estate, should strongly consider the benefits of a cost segregation study.
Research and Development Credits
One area of the tax code that is generally not applied to auto dealers is IRC Section 41 Credit of Increasing Research Activities aka the Research and Development Tax Credit. The automotive industry is always evolving and today’s dealers are developing and utilizing software to remain competitive and engage in e-commerce. Companies using internal-use software and client-facing software are entitled to research and development tax credits for the development and customization of the software platforms and applications. To qualify for R&D Tax Credits, typically an engineer will perform a study and review various aspects of the software and applications to determine which costs will qualify for the credit.
Software engineers will review:
- The sophistication of the system design,
- Database architecture,
- Security administration protocols,
- Front and back-end communication,
- Programming
- Source code algorithm development
The internal-use software features that may qualify include
- Data entry
- Secure document management
- Inventory management
- Back office functions
- Marketing automation
- Reporting system
- Mobile integration
- Analytics
Client-facing software features that may qualify include
- Secure login
- Bill payment
- eSignatures
- Interactive customer service
- Instant quotes
- Social media integration
- Built-in forms
- View/edit profile
- Document duplication
Dealers who are investing in software internally and for engaging in e-commerce to remain competitive in their markets should consider the tax benefits of a research and development study.
If you are interested in learning more about the tax incentives mentioned in this article, please contact me, Bart Haag or one of our other dealership services team members for further information.
Matthew Pore is a Tax Principal with Albin Randall & Bennett in Portland, ME
