It was a joyous day for professionals in the construction and engineering field when the 179D was passed. Although the challenges of American politics have produced little bipartisan agreement, Congress recently agreed on something: if your work involves energy-efficient design and engineering, your business may qualify for a very substantial tax deduction.
The United States government has recognized the AEC industry’s unmistakable driving impact on the future advancement of our local communities, energy infrastructures, and even our worldwide status.
The Energy–Efficient Commercial Building Deduction, more commonly referred to as IRS section 179D, incentivizes green development by providing considerable tax savings that enable significant reinvestment—money that will be recirculated back to the local economies.
For an engineer, builder, architect, environmental consultant, or provider of energy services, the 179D tax deduction is an enticing opportunity. To be eligible, you must have engaged in a building structure located in the United States that was constructed or retrofitted with energy-efficient features while in an open tax year.
Given the opportunity, most builders would likely prefer a project portfolio comprised entirely of government and municipal facilities (e.g., schools, courthouses, etc.) in order to claim 179D.
This is because government agencies do not pay taxes; thus, they are not eligible to claim a tax deduction. However, this does not mean that the benefits must be wasted. The tax code permits the government agency that owns the building to designate the tax deduction to a contractor that provides energy-efficient construction.
Section 179D: What Is It and How to Be Eligible?
Section 179D is a tax credit that was enacted as part of the broader energy laws in 2005. Given that buildings consume approximately 40% of the nation’s energy, the deduction was created as an incentive to recognize the largest single source of energy consumption.
Initially available primarily to owners of commercial buildings, the deduction was later broadened to include architects, engineers, and construction firms that help in reducing the energy use of government-owned structures.
To be eligible for the deduction, the architectural, engineering, or construction (AEC) firm involved in delivering the energy-efficiency improvements must get an allocation letter from the governmental agency that owns the property. Since government institutions are typically exempt from taxation, the owners of such buildings can direct the deduction to the corporation responsible for enhancing the energy-saving measures.
Qualifying Systems for 179D
A construction company may be eligible for 179D if it makes energy-efficient enhancements to the following systems:
- Internal lighting
- Heating, ventilation, and air conditioning or more commonly called HVAC
- Building envelope
Qualifying businesses may claim a tax deduction of up to $1.80 per square foot for qualified buildings established in service between 2006 and 2016, with appropriations by government agency facilities being available for tax deductions within open tax years. Additionally, any tax deductions earned on these properties may be carried back two tax years or carried forward for a period of up to twenty years. Generally, the following examples of government-owned structures are the one which qualifies: schools, state colleges, libraries, town halls, airports, post offices, courthouses, government offices, etc.
Nevertheless, these systems must be improved to exceed ASHRAE 2001 criteria for buildings put into operation prior to 2017—and ASHRAE 2007 level of standard hereafter.
How Much would be the 179D Deduction?
Contractors who are eligible should anticipate receiving a tax benefit corresponding to the percentage of their energy-saving initiatives, one square foot at a time.
After a building is being put into operation, its energy yield can be determined in two ways: partially by dividing it into three kinds of systems (HVAC, lighting, and building envelope) or by calculating the structure’s overall power reduction.
These dollars and cents quickly pile up in huge public buildings, such as airports, and it is vital to quantify even minor contributions.
One of the most generous aspects of 179D is the ability to amend prior returns dating all the way back to 2011 or 2012, which means that even if you just knew about the 179D, you could still claim past projects.
How to Ask for Allocation for 179D
If you desire something, you must ask for it. That is life, and that is how it is with claiming 179D.
As discussed earlier, a governmental agency may grant a contractor a tax deduction for the construction of a building. The deduction is conveyed via a document that is called an allocation letter. This specifies a contractor as the proper recipient of the tax benefit associated with the building.
Navigating the 179D allocation process is one of the most challenging aspects of the program. Applicants are advised to keep pursuing their allocation letters expeditiously, as 179D is often on a first-come, first-served basis. Because many projects involve many builders and engineers, it is critical to request an allocation letter immediately to avoid being outbid by another contractor.
Verifying the energy savings is among the final stage in claiming 179D. A qualified engineer accredited in the state must conduct an impartial, third-party inspection. Before the IRS justifies the deduction, the inspector will utilize simulation of energy and modeling to evaluate the energy savings. In 2016, the benchmark requirement was amended to ASHRAE 90.1 – standards of 2007. Prior years have been held to the ASHRAE 90.1 – standards of 2001.
While these methods sound uncomplicated, administering 179D is far more difficult in practice. A brief phone call with a trained consultant can expedite in determining whether a building project is eligible for 179D and makes economic sense for the company.
As the country strives to update and upgrade its infrastructures, the construction sector has been in the vanguard of a revolution to develop more environmentally friendly and cost-effective structures. Given the increased need for energy-efficient systems, the industry is experiencing a shift in priorities. Construction firms can take advantage of government incentives, including the Energy-Efficient Commercial Building Deduction (commonly known in the tax code as Section 179D).
It is hard to believe that this not-so-known tax deduction has been available for more than a decade. However, the 179D deduction shows that wonderful things can be accomplished when energy contractors and our government institutions collaborate. Expanding your business, stimulating economic growth, and reducing pressure on the nation’s infrastructure are all victories for the AEC industry.
