Section 179D Tax Deduction
The Section 179D Commercial Building Energy-Efficient Tax Deduction (Section 179D) is now permanent, providing potential ongoing tax benefits for architecture, engineering, and construction companies. These entities can claim the deduction after construction is complete on designed projects for government-owned buildings.
If a building is non-government, the owner of the building will be able to qualify for the tax deduction.
Click here to see the IRS Publication.
Before claiming the deduction, however, there are certain rules and regulations companies should be aware of based on timing and contract terms.
Here's how it works.
$1.80 per square foot deduction also now increases slightly each year to account for inflation. Buildings can partially qualify for $0.60 for HVAC, $0.60 for building envelope, and $0.60 for Lighting systems. On December 28, 2020, Section 179D was made a permanent part of the US tax code in the Consolidated Appropriations Act, 2021. This change means architecture, engineering, and construction companies can claim the deduction beyond 2021—letting them plan for and generate significant tax savings from construction projects for government entities.
Section 179D requires the taxpayers building to meet or exceed a 50% savings in energy and power costs when compared to a theoretical ASHRAE 90.1-2007 baseline building. If the target of 50% savings is met, the building will qualify for $1.80/SF (capped at the costs of the capitalized improvements).
For buildings which do not meet the 50% savings, the tax provision also allows for partially qualifying systems.
- $0.60/SF for HVAC systems meeting 15% savings
- $0.60/SF for Lighting systems meeting 25% savings
- $0.60/SF for Building Envelope systems meeting 10% savings
Additionally, the Interim Lighting Rule allows for lighting systems to qualify for 30¢-60¢per square foot for a 25%-40% savings in Lighting Power Density (LPD) compared to ASHRAE 90.1-2007 LPD standards.
- The energy and power costs savings calculations must be performed with a Dept. of Energy approved software.
- Field inspections must be performed after the energy efficient property has been placed into service in accordance with NREL Guidelines
- Certifications and inspections must be completed by a qualified Engineer or Contractor in the Jurisdiction of the qualifying building.
- The taxpayer shall maintain the certification in their records to establish the entitlement to, and amount of, the deduction claimed.
Who can qualify for Section 179D Deduction?
The Section 179D deduction can be allocated to engineering, architecture, and construction entities that are responsible for the design components of government-owned, energy-eﬃcient buildings. Because the owners of these public buildings are nontaxable entities, the deduction is then passed on to the primary designers of the buildings—in this case, engineering, architecture, and construction entities that qualify as designers. The purpose of the deduction is to incentivize designers of government-owned buildings to utilize energy efficient systems and components within the construction projects. An entity is considered responsible for the building’s design components if it creates the technical speciﬁcations for a building. Any entity that installs, repairs, or maintains a property does not meet the definition of a designer for the purposes of this deduction.
In addition, other non-government buildings can qualify. They are commercial buildings of any type, residential buildings of 4 stories or more and parking garages.
Architects and Engineers
Architecture and engineering entities are typically responsible for designing a property’s technical specifications. As a result, they’re likely to qualify for the Section 179D deduction for improvements made to any of the following categories:
- Building envelope
- Heating, ventilation, and air conditioning (HVAC) system
- Lighting system
That said, a company can only claim the deduction for building design elements for which they’re directly responsible. For example, a mechanical engineering firm that’s only involved in the design of a HVAC system in a government-owned building would only be able to take the deduction for the portion derived by the HVAC system.
A construction contractor may qualify for the Section 179D deduction if they have input in the design or are obligated to participate in the design based on their contract terms. For instance, contractors that are engaged on a design-build contract with a government entity are more likely to qualify for the Section 179D deduction than if they’re only operating as a project manager.
Inquire at Innovative Engineering to see if you qualify!