The 179D tax credits, or the Commercial Building Energy-Efficient Tax Deduction is now permanent, providing potential ongoing tax relief and benefits for companies involved in the architecture, engineering, and construction industries.
These companies can claim the deduction after completing construction activities on dsigned projects for government-owned buildings. However, before they can claim the deduction, they must be aware of some rules and regulations concerning timing and contract terms.
In this article, we’re going to discuss how the 179D tax credits could give your company huge tax savings. We will also be looking into industry-related guidelines and restrictions.
What is the 179D Tax Deduction?
By claiming a 179D tax credit, taxpayers are entitled to as much as $1.80 per square foot deduction when conducting efficiency improvements above some specific energy thresholds to commercial buildings. This deduction also increases slightly every year, due to inflation.
The 179D tax credit was made a permanent part of the US tax code in the Consolidated Appropriations Act of 2021. This simply means that companies in the engineering, construction, and architecture industry can claim the deduction beyond 2021. This allows the said companies to plan or and create significant tax savings from construction projects for government organizations and/or agencies.
Is it Possible for Engineering, Construction, and Architecture Companies to Claim the 179D Tax Credits?
The answer is, YES. The 179D tax credit can be granted to architecture, engineering, and construction companies that are responsible for the design components of energy-efficient, government-owned buildings.
The deduction is passed over to the main or primary designers of the buildings because the building owners are non-taxable organizations. In this case, the architecture, construction and engineering companies are considered the primary designers.
The main point of the deduction is so the government can incentivize designers of government-owned buildings to use energy-efficient systems and parts throughout the construction projects.
An entity or organization is held responsible for a building’s design components if they create the technical specifications for a building. Any entity that installs, repairs, or maintains property does not qualify as a “designer” for the purposes of this deduction.
Entities Responsible for the Design Components
Architects and Engineers
Architecture and engineering companies are usually the ones responsible or designing a property’s technical specifications. For this reason, there’s a huge chance that they will qualify for the 179D tax credits for improvements made on any of the following:
- Building envelope
- Lighting system
- HVAC system (heating, ventilation, and air conditioning)
It is said that companies can only claim the 179D tax deduction for building design components that they are directly responsible for. For instance, a mechanical engineering company that is only responsible for designing the HVAC system of a government-owned building only qualifies for the deduction for the parts derived from the HVAC system.
Construction contractors can qualify for the 179D tax credit if they contribute to the design or are required to participate in the design based on their contract terms. For example, contractors that are involved on a design-build contract with a government organization have a bigger chance to qualify for the tax credit than if they only operate as a project manager.
Will Claiming The section 179D Tax Credit Result To an IRS Audit?
Entities responsible for the design components of government-owned buildings and properties that claim the credit will not trigger an IRS audit. Do note, however, that you must follow the right steps to determine if you qualify for the deduction.
How Does a Company Claim the 179D Tax Credits?
Companies can claim the 179D tax credit by receiving a section 179D study in the same tax year as when the building is put into use. If they satisfy the requirements of the study, they can report the deduction on its current-year tax reform.
The deduction can be up to $1.80 per square foot (which increases over the year due to inflation). If your company claims the credit for only one component of the building, for example, the HVAC system, you can only claim the credit at $0.60 per square foot. You can also do this retroactively if you decide to file an amended return.
What is the Section 179D Study?
The Section 179D study is a study wherein a qualified third-party (independent from the designer taking the tax deduction) uses energy software approved by the IRS to model the energy performance and improvements of the building.
The energy model then looks into the building’s performance and compares it with a reference building that satisfies the related energy and power cost requirements (based on standards set by the American Society of Heating, Refrigerating, and Air-Conditioning Engineers or ASHRAE). The third-party also conducts a physical site visit to the building.
It’s important that the qualified third-party is a contractor or a professional engineer (PE) and is licensed in the state where the building is located. The must check the results of the energy model and confirm whether the improvements meet the necessary energy-savings limits set by the ASHRAE standards. They should also sign a document for the 179D tax deduction saying they have inspected the energy model and support the allocation of the deduction to the right designer.
These refer to the documents that state a building meets the 179D tax credit’s energy and power cost requirements. These letters are signed by both the designer and authorized personnel within the government organization. The government organization can choose whether to allocate the bulk of the deduction to only one designer or to distribute the allocations equally to multiple designers.
How Do you Report the Section 179D Deduction?
Building owners report the Section 179D tax credit as a line item just below other expenses for the applicable tax year. Building owners should are also required to reduce the tax basis of the property by the amount of the deduction.
Designers, or the contractors, architects, and engineers, that qualify for the deduction for the government-owned property also report the deduction as an item under their expenses for the applicable tax year. They don’t have to acknowledge gross income or deduct future reductions by the amount allocated by the 179D tax credit.