Winter 2006

Construction Advisor

Lighting System Installation Opportunities

The Energy Bill (Energy Tax Incentives Act of 2005) passed by Congress last August contains several energy conservation incentives that benefit businesses. One of these is a deduction for capital improvements to commercial buildings' interior lighting systems. There is also a deduction for major energy-savings improvements to commercial buildings but the technical details are not yet available. The technical details and benefits available for lighting system improvements are available now.

Basically, up to $.60 per square foot of lighting system capital improvements can be expensed for tax purposes in the year of purchase. Normally these expenditures need to be capitalized and depreciated over a long period of time, typically 39 years. To qualify, the lighting systems need to meet certain technical energy benchmarks. The property must be placed in service between Jan. 1, 2006 and Dec. 31, 2007 to qualify. The building need not be new to get the deduction.

A deduction can be generated for any lighting system plan that reduces lighting power density by at least 25% from the minimum standards set in Standard 90.1-2001 of The American Society of Heating, Refrigeration and Air Conditioning Engineers and the Illuminating Engineering Society of North America (ASHRAE/IESNA) in table 9.3.1.1 or table 9.3.1.2. A 40% reduction in lighting power density is required for the full $.60 per square foot deduction. Lesser reductions get a prorated benefit. The lighting systems still need to meet minimum lighting levels set forth in the IESNA Lighting Handbook, Performance and Application, 9th Edition, 2000.

There are other energy incentives in the Act that may benefit your business as well. The heating and cooling improvements deduction will have details soon, but regulations have not yet been issued by the IRS. There is also a credit for energy efficient residential home construction.

Look-Back Calculations: A Hot Topic

At the recent AICPA National Construction Conference, the head of the IRS Construction Practices Group indicated the IRS has made the look-back calculation a high priority in all future audits.

The IRS has added a new chapter to the IRS audit technique guide they use when performing an examination of a construction company (you can get a copy at www.irs.gov/businesses/small/industries). In addition, they issued an IRS industry directive to alert revenue agents to examine this issue.

According to IRS statistics, 71 percent of the required population is not filing required look-back forms and of those filing 84 percent have errors. The most common error is the changing of interest rates on a quarterly basis. It should change only on an annual basis.

In August 2004, the IRS formed an emerging issues team to look at the numerous problems encountered in complying with this complicated area of the tax law. Their recommendations were:

1. The IRS is in the process of releasing an Excel spreadsheet that can be used to calculate the look-back adjustment.
    
2. They are looking at revising Tax Form 8697 and the related instructions in 2007.
    
3. They are pushing for legislative/regulatory changes including having an entity level filing for pass-through entities rather than the current shareholder level computation.
    
4. They will begin issuing "soft non-compliance" letters to construction companies that do not file look-back computations in an effort to improve compliance.

Therefore, it is important that you review compliance with the look-back rules as well as the calculations to ensure that you are properly complying and to avoid any unpleasant surprises upon an IRS examination.

Editor's Note: A well-run collections plan makes a significant contribution to positive cash flow. Bober, Markey, Fedorovich & Company frequently works with clients on matters such as this. Please call your partner / manager contact if you would like assistance in this area.

The Construction Advisor is produced quarterly by Bober, Markey, Fedorovich & Company's Construction Services Team. If you would like additional information about the services that we can provide to construction companies and contractors, please call or email our team leader, Dale A. Ruther, CPA, CIT at (330) 762-9785 or dale@bobermarkey.com.

This Web Site is designed to present accurate and authoritative general information on a broad range of tax and accounting issues. For personalized advice on matters effecting your rights under the law and/or the drafting of legal documents, you should consult a licensed attorney.

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