Possessing or running more energy-efficiently built or renovated buildings may boost your cash flow by lowering your federal income tax obligation for the current year. Designers of buildings owned by the government can also often benefit from this tax-deferral method.
To shed more light, we’ve tried to answer the top frequently asked questions below.
The Section 179D Tax Deduction: What Is It?
Section 179D, sometimes called the Energy Efficient Commercial Building Property Deduction, is a tax credit for installing energy-saving measures in commercial buildings.
When working on any one of the three building systems listed below, qualified building owners and designers are eligible to get a tax deduction of up to $5.36 per square foot under Section 179D:
- Interior lighting
- Building envelope
- Hot water, HVAC (heating, ventilation, and air conditioning)
Why Did Congress Create the Section 179D Deduction?
The US government established Section 179D as a component of the 2005 Energy Policy Act to encourage commercial building owners to construct more energy-efficient structures.
To enable government building owners to assign the prospective tax benefit to the energy-efficient property’s designer, this deduction was extended in 2008.
Is the Deduction Under Section 179D Perpetual?
Yes, the Consolidated Appropriations Act of 2021 made the Section 179D deduction permanent and included updated energy efficiency standards based on project completion dates and inflation changes to its value.
How Should a Section 179D Study Be Conducted?
The same fundamental procedures must be followed for every Section 179D study on a government-owned building:
- Evaluate the designer’s suitability for the assignment.
- Give the designer the deduction. Utilizing software certified by the DOE, create an energy model.
- Visit the location with a certified person to confirm that the energy model matches the characteristics put into operation.
- A licensed engineer or contractor in where the building is located must certify the study.
You would skip the first two phases for Section 179D studies on a building you own because you do not have to be the designer or receive a deduction.
How Does Section 179D Eligibility Work?
There are two primary ways to be eligible for the deduction under Section 179D:
- Owners of commercial buildings who construct new structures, remodel existing ones,
- And add on designers of work carried out on structures owned by the government
Both entail working on one or more of the three building systems for a commercial building.
The building must meet the requirements of the American Society of Heating, Refrigeration, and Air Conditioning Engineers (ASHRAE) Standard 90.1, which covers the majority of commercial and residential structures with four floors or more.
A Section 179D Allocation: What Is It?
The government entity is not qualified for the Section 179D deduction because it is non-taxpaying; therefore, an eligible designer would need an allocation letter to take the deduction.
Receiving this deduction encourages designers to produce government commercial building properties with higher energy efficiency.
Who Is Eligible for Section 179D Designer Status?
IRS notice 2008-40 defines a designer for the Section 179D deduction as an individual who develops technical specifications for installing energy-efficient commercial building property for a new construction, retrofit, or building addition project. Based on this, eligible taxpayers consist of:
- Engineers, contractors, and architects
- Environmental experts
- Suppliers of energy services
The traditional definition of designer, which usually exclusively applies to architects and engineers, differs from this more inclusive meaning in construction, engineering, and architecture. The requirement for technical standards created by the designer to install energy-efficient commercial building property makes the difference. Although other kinds of firms might also be considered designers, architects and engineers are almost always the main designers.
Energy service providers frequently use their knowledge to increase energy efficiency by updating the HVAC system and implementing building automation.
For building envelopes, specialty contractors are frequently brought in throughout the design process if the engineer or architect requests specific features.
What Happens If You Deduct Under Section 179D?
As explained below, the Section 179D deduction will differ for designers and building owners.
Creator: In the year when the commercial building property was put into service, the designer claimed a tax deduction. It may be possible to amend tax returns for years where a Section 179D opportunity was recognized if the building was put into service during a prior tax year.
Owner of Building: A building owner doesn’t need to claim the deduction in the tax year that the commercial building property was put into use. The deduction can be made on a current return, or it can be made with an amended return or an automatic change in accounting method for properties that were put into operation during previous periods. The amount of the Section 179D deduction is deducted from the commercial building’s basis.
When Must a Section 179D Study Be Finished?
After all construction is finished and the building is occupied, usually during the tax year that the building is in use, a Section 179D study is carried out.
Designers may be able to use amended returns to finish a study up to three years after the work is completed. Nevertheless, owners of commercial buildings are not restricted to three years and may use a Section 179D deduction for previously installed qualifying work by submitting a 3115.
Take Action Today
The 179D Energy Efficient Commercial Building Tax Deduction provides a vital opportunity for architects and builders to enhance their properties, improve cash flow, and contribute to sustainability efforts. With the enhancements brought by the IRA, now is the perfect time to explore how these changes can benefit your business.
Connect with National Tax Group today for expert guidance on claiming the 179D deduction and maximizing your tax savings. Our team of tax specialists, engineers, and energy modelers is ready to assist you in navigating these updates and ensuring you take full advantage of the available benefits.