The Section 179D Energy Efficient Deduction encourages green construction and upgrades with a powerful financial incentive. Maximized, the §179D deduction can easily reduce taxable income by six figures.
This deduction can flow to engineers, architects and contractors who serve as primary designers of the building or renovation for a non-profit or government owned building.
For those seeking to claim the §179D deduction, here is a step-by-step guide to documentation, certification and claim submission.
Step 1: Consider energy-efficient improvements
Whether embarking on new construction or retrofitting an existing commercial or multifamily residential building, those improvements apply to:
- The building’s outer envelope (i.e., its perimeter, including roofing, windows, doors and insulation.)
- HVAC and hot water systems
- Interior lighting systems
Step 2: Fulfill the eligibility requirements
Eligibility depends on:
- The type of building – The deduction applies to commercial buildings, whether owned by for profit or tax-exempt organizations, and multifamily residential buildings with at least four units.
- The energy efficiency achieved — Energy efficiency must meet standards established by either the ASHRAE (American Society of Heating, Refrigerating, and Air Conditioning Engineers) for new buildings or the building’s own history for renovations.
Step 3: Hire NTG to conduct an energy audit
In order to qualify for the deduction, you must hire a licensed engineer to produce an energy modelling report, which must meet strict IRS requirements. They must employ IRS-approved software that measures your building’s energy performance against the standard for the deduction. If the audit determines that the building meets the required energy savings, it may qualify for the deduction.
National Tax Group’s energy modelling reports ensure compliance with a 100% track record of holding up under IRS scrutiny. NTG can also identify additional tax savings opportunities through cost segregation and R&D tax credits.
Step 4: Determine how much tax deduction your building qualifies for
The value of the 179D deduction has increased dramatically since 2022, now worth up to $5.65 per square foot. It breaks down like this:
- Base deduction = $0.58 per square foot for power cost reductions of 25%.
- Additional deductions = $0.02 per square foot for each percentage point over 25%.
- Maximum deduction = $1.16 per square foot at 50%.
- Additional deduction for paying prevailing wage and apprenticeship requirements = $2.90 per square foot
- Additional deductions = $0.12/ square foot for every percentage point over 25%.
- Maximum deduction = $5.65/ square foot.
Step 5: Gather the documentation
The IRS requires voluminous paperwork to support a 179D claim. That includes:
- Energy audit by engineer and certification
- Building plans and specifications
- An allocation letter in the case of a tax-exempt entity whose deduction flows to the building’s primary designer.
Step 6: Complete IRS Form 7205
It is not too late to file for the Section 179D deduction. Claiming the deduction is complex and requires the expertise of third parties. But the rewards can be substantial – potentially a six-figure deduction for a 17,000-square-foot building. Contact NTG today for a free, no-obligation discussion about how we can help you claim the 179D.
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