In June 2022, the Large Business and International (LB&I) Division of the Internal Revenue Service (IRS) released a new 53-page document about the 179D deduction for energy-efficient commercial buildings. The document, a Practice Unit for agents auditing the deduction, reveals an increased focus on the eligibility of designers responsible for government buildings.
National Tax Group’s in-house tax experts specialize in 179D deductions. We’ll walk you through all the new information this document provides, and what it means for your business.
What is the 179D Tax Deduction?
Originally passed under the 2005 Energy Policy, 179D provides a tax deduction for energy efficiency improvements to recently constructed or renovated commercial buildings. Building owners or eligible designers can claim a tax deduction of up to $1.80 per square foot for all services before 2021, $1.82 for services places in 2021 and $1.88 for services places in 2022. Services must reduce energy consumption to meet certain target levels in comparison to buildings that meet the minimum requirements.
Qualifying energy-saving systems include…
- Hot water systems
- Building envelope systems
- Heating, ventilation, and air conditioning (HVAC)
- Interior lighting systems
- Insulation in ceilings, walls, floors, and roofs
- Lighting sensors and controls
Since government entities do not pay taxes, tax incentives for improvements to government buildings are passed along to the designer responsible for the energy-efficient upgrades. These designers need an allocation letter from the government entity to claim the 179D deduction, in addition to the standard documentation and energy analysis.
IRS Update on 179D
The new document released in June is a Practice Unit, which serves as a job aid and training material for IRS staff. According to the IRS, “Practice Units are not official pronouncements of law or directives and cannot be used, cited or relied upon as such. Practice Units provide a general discussion of a concept, process or transaction and are a means for collaborating and sharing knowledge among IRS employees. Practice Units may not contain a comprehensive discussion of all pertinent issues, law or the IRS’s interpretation of current law.”
Despite the disclaimer, the Practice Unit reveals a shift in focus for the IRS. The 179D deduction can benefit both commercial building owners and, in the case of upgrades to government buildings, eligible designers. However, the Practice Unit focuses on training IRS employees to examine the eligibility of government building designers in particular.
Designer Eligibility
Eligible designers are defined as “the person primarily responsible for designing the [energy efficient commercial building property (EECBP)] and creates the Technical Specifications for EECBP installation,” such as “an architect, engineer, contractor, environmental consultant or energy services provider.” The document specifies that eligible designers do not include people who only install, repair, or maintain the property.
To check for eligibility, the Practice Unit emphasizes that IRS employees examine design contracts for indications of the taxpayer’s responsibilities in the project. Additionally, they should review the type of drawings submitted by the taxpayer. Designers are required to provide stamped or sealed technical specifications to qualify for the 179D deduction.
The Practice Unit also stresses that receiving an allocation letter from the government entity that owns the building doesn’t entitle a taxpayer to the 179D deduction alone. The government building owner is not authorized to determine if the taxpayer meets the requirements of being the designer — if the IRS determines that the taxpayer is not the designer, the allocation letter will not change that decision. IRS employees are also encouraged to verify that the person who signs the allocation letter actually has the authority to do so.
The final step outlined in the Practice Unit discusses penalty considerations. For IRC 179D deduction adjustments that result in underpayment or an excessive refund or credit, IRS employees are encouraged to consider accuracy-related penalties and erroneous claims for refund.
Consult a National Tax Expert
A major takeaway from the IRS 179D practice unit is that the IRS is placing the 179D deduction under intensive scrutiny. Now more than ever, it’s important to consult with a dedicated tax specialist to make sure all qualifications are met and all documentation is accurate and properly filed.
National Tax Group’s team of specialty tax experts has over 20 years of collective experience in complex tax incentive programs, and the 179D deduction is one of our specialties. We can guide you through the process of claiming your deduction and ensure that your documentation is accurately completed down to the last detail. Contact National Tax Group today to claim your overlooked tax perks — your first assessment of benefits is always free.
