The Consolidated Appropriations Act of 2021 (the “CAA” or the “Act”) was signed into law on December 27, 2020. At 5,593 pages, the Act is one of the largest in history, and can be viewed in full at here. The CAA establishes funding for government operations throughout the fiscal year. It also contains a number of personal and business tax provisions, and those most relevant to Capstan clients will be briefly reviewed here.
Congress crafts tax extension packages annually, and these packages generally extend incentives by a certain number of years. In exciting news, the CAA permanently extended the EPAct 179D tax deduction. It will be adjusted for inflation beginning in 2021. This powerful incentive can help investors more confidently move forward, knowing that they can earn up to $1.80/SF in deductions. As before, properties eligible for the 179D deduction may be either commercial property or residential rental property at least 4 stories high. New construction and renovation projects are both eligible for this tax strategy. Energy-efficient improvements made to the following building assets can contribute to this benefit:
- Interior lighting
- Building envelope assets
For buildings placed-in-service after 1/1/2016, the program-designated reference benchmark had been ASHRAE 90.1-2007. The CAA made one additional change regarding the reference standard in use for projects placed-in-service after 12/31/2020. The CAA updates the reference standard to the most recent ASHRAE standard in effect not later than the date that is 2 years before the date that construction of such property begins.
Home builders and multi-family developers have something to celebrate as well. The CAA extended the 45L tax credit for one year, meaning that it is now available through 12/31/2021. As before, the 45L-eligibility is restricted to residential rental property with a maximum of 3 stories, providing a $2,000/unit tax credit for qualifying unit/s.
Many clients may be able to take advantage of this news to get even more value out of their Capstan projects. As in the past, taxpayers may use a 3115 to complete a look-back study on assets or properties placed into service after 1/1/2006 for 179D. There is no 3115-method available for capturing the 45L credit, however past returns may be amended.
In additional good news for owners of rental property, the CAA shortened the Alternative Depreciation System (ADS) class life of residential rental property to 30 years for property placed-in-service before 1/1/2018. The Tax Cuts and Jobs Act (TCJA) did shorten the class life of this property from 40 to 30 years, but that only applied to property placed-in-service post-TCJA. The CAA now permits all residential rental property to be depreciated using an ADS life of 30 years, regardless of when it was placed-in-service.
Some owners choose to avoid the business interest expense deduction limitation by electing to be treated as real property trades or businesses. Those owners must depreciate property using ADS. Going forward, they will be able to depreciate residential rental property as 30 years. Plus, since this change is retroactive, owners will be able to revisit previous returns and amend them to take advantage of the shorter class life.
If you’d like to learn more about these or other opportunities, we’re here to help in any way we can. Tax season has begun, and as always, we’ll get through it together.