Section 179D Deduction – Putting Money in your Pocket
Section 179D – Energy Efficient Commercial Building Deduction Putting Money in your Pocket.
Many of us are familiar with the potential acceleration of the deduction under Internal Revenue Code Section 179D, mainly the $0.60 to $1.80 per square foot of qualified space in an energy efficient building you own. The deduction has three components: building envelope, HVAC, and lighting. Each adds $0.60 per square foot, as a deduction for buildings that qualify as energy efficient. We also know that it is just a timing adjustment and the engineering studies to prove energy efficiency are expensive, many times are more than the time-value of the tax savings.
What many contractors do not know is that designers and builders of government owned buildings qualify for an even better deduction. Eligible designers and builders (architects, engineers, contractors, environmental consultants, and energy service providers) can qualify for Section 179D under a special rule for public property. In these cases, designers and builders that have enhanced the energy efficiency of a new government owned building that they helped build or made energy savings renovations and retrofits to existing government owned buildings may be eligible to claim the deduction. As government entities do not traditionally pay tax, the owners of these buildings can allocate the accrued tax savings to the business responsible for the energy saving enhancements. Government owned buildings at the Federal, state, or local levels that can potentially qualify for Section 179D, include:
- Schools
- State universities
- Libraries
- Town halls
- Airports
- Prisons
- Transportation facilities;
- Post offices
- Court houses
- Military bases
- Government offices
- Dormitories
Requirements for this enhanced deduction are:
- Qualifying for Section 179D using an independent, third-party firm to review the building and prepare a study to confirm the energy savings and calculate the tax deduction.
- Obtaining permission to claim the allocation from the government agency. (A consultant specializing in this area should be retained).
Businesses that are seeking Section 179D based on work performed on government owned buildings are required to secure an allocation letter that allows the government entity to transfer the benefit to the taxpayer. Unlike a commercial building, where the potential deduction goes to the owner, here the builder obtains the benefit. Even better, the deduction is not an acceleration but a permanent reduction of taxable income. It is not uncommon to realize tax deductions that are worth tens or hundreds of thousands of dollars. We have developed a working relationship with a nationally recognized expert in this field and obtained millions of dollars of tax deductions for our construction clients. The engineering studies and allocation letter procurement require specialized knowledge, specific software modeling programs, and the ability to reach the correct decision-makers in the correct government agency in order to qualify for the deduction.
Contractors who attempt to do the modeling themselves quickly discover that adhering to ever-changing baseline standards to be very difficult, if not impossible. Likewise, identifying, contacting, and convincing the responsible person within the government, to grant you the allocation letter is often an exercise in frustration.
Another point to remember, to further increase tax savings, is that while you can be granted an allocation letter for an upcoming project, it is also possible to be granted one for a completed project, allowing you to “go back” up to three years and file refund claims. Every contractor should explore this valuable tax savings option.