How to take advantage of the 179D tax deduction
A long-awaited extension of the 179D tax deduction could save architects thousands of dollars. AIA partner Engineered Tax Services explains how to secure your allocations.
On December 20, President Trump signed the Consolidated Appropriations Act of 2019 (H.R. 1158). This bill is notable for the architecture, construction, and engineering industries because it includes a long-awaited extension of the 179D deduction for energy-efficient commercial buildings and the 45L tax credit for energy-efficient homes and multifamily properties, both of which expired on December 31, 2017.
In addition, this extension has now made both tax incentives retroactive for projects completed in 2018, 2019, and 2020 and encourage the design and installation of energy-efficient building systems and overall energy conservation in commercial buildings and multifamily properties.
What is 179D?
The Energy Policy Act of 2005 originally passed in 2005 and has been renewed numerous times since with several changes to the level of efficiency required to qualify for the deduction.
The 179D tax deduction incentivizes building owners and designers for installing energy-efficient buildings systems, including lighting, HVAC, and building envelope components, and it applies to both new construction and retrofits. Any commercial building or multifamily properties that are four stories or higher may claim the deduction.
The tax benefit is a federal tax deduction from $0.30 per square foot to $1.80 per square foot based on the following requirements:
How is 179D allocated to architects?
The 179D deduction may be taken by any private property owner whose building meets the energy requirements reflected above; however, the most valuable benefit for architects is the ability to allocate the deduction to the architect or the entity who designed the technical specifications for a public entity. Because public entities are non-taxable, the deduction cannot be utilized, so the tax code allows this deduction to be gifted to the architect or designer as an incentive to focus on energy efficiency and conservation in our public spaces.
Eligible buildings include city, state, county, and federal buildings such as public universities, K-12 schools, police and fire stations, military bases, and federal government buildings.
Previous requirements that small businesses pay a fee for signing 179D allocation agreements have since been backtracked, so architects should not be required to do so by their state and local government entities. Architects should not have to pay a fee to local and state government entities to receive an allocation letter, per the Department of Treasury. (Consult with Engineered Tax Services should you face such a requirement.)
In recent years, some city and state agencies have implemented processes for determining who can receive the allocation and how to issue them. The tax code itself states simply, “The allocation of the deduction [is] to the person primarily responsible for designing the property in lieu of the owner of such property.” 26 U.S.C. § 179D
Some state agencies also have created processes for handling requests. For example, before signing the allocation letter, Utah requires a signed affidavit from all architects and engineers on eligible projects, stating whether they will participate in the deduction or choose to opt-out. This process ensures transparency and equal opportunity to involved parties who often share a percentage of the tax deduction and certification fees.
Getting the deduction
Architects with eligible public projects that were completed between January 1, 2016, and December 31, 2020, can claim the deduction on the applicable tax return. Submitters must include the signed allocation letter and a letter of certification from a third-party engineer who has performed the required energy modeling and a physical site visit on each building.
Engineered Tax Services, for example, is a licensed engineering firm specializing in this type of energy modeling related to IRS tax requirements and offers complimentary benefit analysis and quotes for certification.
45L tax credit for low-rise multifamily
The 26 U.S. Code § 45L offers a $2,000 tax credit to the developers of low-rise multifamily properties of three floors or less, and to single-family residential homes. The energy-efficiency requirements include:
- The dwelling must show at least a 50 percent reduction in heating and cooling energy consumption compared to other units constructed in accordance with the standards set forth in the 2006 International Energy Conservation Code (IECC).
- At least 10 percent of the energy savings associated with heating and cooling must be derived from attributes associated with the building envelope (roof, walls, windows, etc.).
Although only the dwelling unit’s heating and cooling systems’ energy consumption are used to
determine the requirements for the tax credit, many other factors play a key role. These factors include insulation, internal heat gains from lights and appliances, window coverings, exterior building color, mechanical ventilation, size of windows, exterior shading, climate zone, duct location, and unit’s air tightness, just to name a few.
Engineered Tax Services offers a complimentary “Builders Guide to 45L,” which can be used to evaluate a property’s qualifying ability and to proactively consult with clients during the design process for capturing this valuable tax credit.
If you are interested in more information relating to the 179D or 45L incentives, or a review to determine eligibility, contact Heidi Henderson at Engineered Tax Services.
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