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Energy Efficient Deduction, Work Opportunity Credit, Deducting Litigation Costs

Berdon Tax Team
05.23.2016 | eVisor
Deduction for Investing in Energy Efficient Equipment

Internal Revenue Code Section 179D provides for a deduction for the costs of new energy efficient equipment installed in a commercial building. The recent PATH Act1 extended the effective date to include property placed in service during 2015 and 2016 and Congress is considering further extensions. Here is how 179D works.

Section 179D is unusual in that the amount of the deduction is based upon the square footage of the building and not the cost of the improvement. The amount can range from 30 cents to $1.80 per square foot of building space. The basis of the improvements is reduced by the section 179D deduction. The remainder of the costs can be depreciated under normal rules.

Property can qualify for the deduction if a system is installed as part of a plan to significantly reduce total annual energy and power costs of a commercial building. A deduction is allowed for the costs of:

  • Interior lighting systems;
  • Heating, cooling, ventilation, and hot water systems; and
  • Improvements to the building envelope — walls, floors, roofs, doors, windows, skylights.

Before you may claim a section 179D deduction, you must receive a certification by an unrelated licensed engineer or contractor. Where the building improvements are made by a governmental entity (e.g., a public school), the section 179D deduction can be allocated to the person responsible for designing the property (e.g., an architect, engineer, or consultant).

1 Protecting Americans from Tax Hikes Act of 2015.

If you have questions, contact your Berdon advisor. Berdon LLP, New York Accountant

Extended Deadlines for the Work Opportunity Tax Credit

The IRS has extended the time for employers to claim the work opportunity tax credit (WOTC) to May 31, 2016, for employees hired from January 1, 2015. For employees hired from January 1, 2016, the deadline is also extended to May 31, 2016, under a new category for the long-term unemployed established under the PATH Act1.

Employers qualify for the credit by filing Form 8850 which is usually due no later than 28 days after an employee begins work. Timely filing is essential to claiming the WOTC. When the credit was extended retroactively to the beginning of 2015 by PATH Act, it was uncertain how employers who hired eligible employees in 2015 would be able to file the form in a timely way and certify those employees.

IRS Notice 2016-22 clears up the uncertainty. Under the notice, employers hiring members of a targeted group — except the long-term unemployed – on or after January 1, 2015, and before May 31, 2016, will be considered to have filed Form 8850 in a timely way. The form must be filed with the designated local agency (DLA) by June 29, 2016.

The notice also extends the time to obtain the certification for qualified long-term unemployment recipients — the new category created under the PATH Act. A qualified long-term unemployment recipient is anyone certified by a DLA as being unemployed for not less than 27 consecutive weeks and includes a period where the individual was receiving unemployment compensation under state or federal law.

Long-term unemployed employees only qualify for the credit if they are hired beginning January 1, 2016, through Dec. 31, 2019. For those who began work on or after January 1, 2016, and on or before May 31, 2016, the employer has until June 29, 2016, to submit the completed Form 8850 to the DLA to request certification.

For employees hired after May 31, 2016, the IRS has not extended the due date of Form 8850 which must still be filed within 28 days.

1 Protecting Americans from Tax Hikes Act of 2015. Also see IRS Notice 2016-22.

If you have questions, contact you advisor

Patent Litigation Costs Can be Currently Deducted

Whether attorney’s fees and other costs in business litigation can be currently deducted has always been a thorny issue. The IRS recently ruled that costs incurred by a taxpayer to protect against patent infringement by a competitor could be deducted currently (i.e., as the costs are paid or accrued)1.

The tax treatment of litigation costs are analyzed under the so-called “origin of the claim” test to determine the tax treatment, as opposed to the potential consequences to the taxpayer of the resolution of the lawsuit or the purpose in participating in the lawsuit. Under this analysis, the costs of claims relating to capital transactions (e.g., acquisitions of property) are capitalized and costs of claims related to ordinary business functions are currently deductible.

The taxpayer in the IRS ruling had licensed a patent from a related entity. Under the license agreement, the taxpayer had a contractual obligation to protect the patent from any infringement. The taxpayer brought a patent infringement claim against a competitor who countered that they had not infringed and that the patent had not been validly issued.

The IRS held that the litigation costs were deductible since the origin of the claim related to the business use of the patent. Cases and rulings have generally permitted taxpayers to deduct the costs to protect against infringement of a patent. It was noted in the ruling that if the lawsuit had related to whether the taxpayer had title or ownership of the patent, the costs would have been required to be capitalized.2 The competitor had contended that the patent was not validly issued and not that the taxpayer was not the true owner of the patent.

1 PLR 201536006 (June 1, 2015)

2 See Treas. Reg. sec. 1.263(a)-4(d)(9)

If you have questions, contact your Berdon advisor. Berdon LLP, New York Accountant.