November 16, 2016
IRS Code Section 179D Deduction: Benefits for Those Who Make Buildings More Efficient
By Joseph Molloy, Director, Tax & Business
Those who make buildings more energy-efficient might be missing out on an often overlooked provision of the tax code.
What is IRC Section 179D?
Section 179D of the Internal Revenue Code allows a tax deduction of up to $1.80 per square foot for building owners or tenants who paid for and own energy-efficient improvements or the designers of an energy-efficient new or reconstructed building. This section of the Code was first introduced in the Energy Policy Act of 2005. The premise of the Act was to promote the building of energy-efficient construction, decreasing energy costs and increasing profits while reducing the nation's dependence on foreign oil, and increasing America's energy security. The Act has also increased job creation within the trades, engineering and steel production industries due to the great number of energy-efficient retrofits resulting from the program. The Act has been extended four times and is presently set to expire December 31, 2016.
How Does 179D Work?
Commercial building renovations and construction that achieve certain energy-efficient reductions and savings are entitled to direct tax expensing deductions of the renovation or construction costs during the year the commercial building is placed in service.
In order to be eligible for the benefits of the program, a 50% savings in energy and power costs must be achieved. These systems must meet the energy efficiency standards as outlined by the American Society of Heating, Refrigerating, and Air-Conditioning Engineers, or ASHRAE. The savings percentage is computed by an independent engineer or architect, who will provide the taxpayer with a computer modeling certification of the power savings as compared to the ASHRAE standards. (Only certain pre-approved Department of Energy software programs may be utilized in order to compute the savings by square footage).
For purposes of the benefits of this code section, energy efficiency is measured in the following three areas:
- Building envelope - including roofs, walls, windows, doors, foundations and insulation.
- Heating, refrigeration and air conditioning (HVAC) systems.
Once it has been determined that a 50% savings in energy and power costs have been achieved, a deduction of up to $1.80 per square foot can be applied
on the taxpayer's return.
If an overall 50% savings is not me, then the deduction can be broken down as follows:
- 60 cents per square foot for HVAC systems achieving 15% savings.
- 60 cents per square foot for lighting systems achieving 25% savings.
- 60 cents per square foot for building envelope systems achieving 10% savings.
Even being able to claim only a partial deduction can give the taxpayer substantial tax savings for engaging in green building practices.
The deductions reduce the basis of the new building similarly to depreciation. While the deduction is similar to depreciation, the Section 179D rules require that the deduction will be included as an ordinary deduction within the tax return filing.
What Buildings Qualify?
- Office buildings.
- Retail buildings.
- Industrial buildings.
- Apartment buildings (at least 4 stories).
This means that most types of buildings should potentially qualify for the tax deduction if the improvements that are made or the new building systems themselves meet the energy efficiency requirements.
179D Helping Designers
Because government entities are not subject to tax, any renovations covered under this code section would not provide the entity any benefit. However, the government entity may allocate part or all of the deduction to the designer, architect or engineer who creates the plans for the energy-efficient qualifying property. (This is simply completed with an allocation letter from the government entity). The purpose of this rule is to incentivize designer groups to consider energy-efficient plans in the designs presented to their government clients.
A designer may include an architect, engineer, or contractor who creates the technical specification for a new building or an addition to an existing building that will use energy-efficient commercial building property.
What Are Considered Government Buildings?
- Government offices.
- Public schools.
- State Universities.
- Transportation facilities.
- Post Offices.
- Military Bases.
- Public libraries.
- Court houses.
What Is Being Missed?
Many states -- New York, for example -- have energy efficiency renovation or building standards that exceed ASHRAE 2007. This means that almost all renovations meet the Section 179D requirements allowing owners to take advantage of these deductions. Further, any LEED- certified renovations or buildings are guaranteed to meet the requirements.
An analysis of Section 179D benefits should be included in any cost segregation study as well.
As noted above, the law has expired and been extended multiple times. Prior to its recent extension under the PATH Act signed in December 2015, it had previously expired on December 31, 2014. The 2015 extension to the law specifically allows those who qualify for the deduction to go back and claim it within amended returns.
Further, those taxpayers who may have missed the analysis during the year the building was placed in service may obtain the computer modeling certification at a later date and, therefore, may potentially be allowed to make claims going back six years for qualifying buildings and improvements that were placed into service.
Contractors, architects and engineers working with or on building envelopes, HVAC or lighting systems could benefit from discussing this deduction while considering bids with the building owners/tenants.
Energy efficiency upgrades improve the reliability and performance of buildings, while reducing demands on the nation's energy supply.
The tax advisors at Marcum can assist you in cost segregation analysis and obtaining the computer modeling certification as required within Code Section 179D.
If you have any questions related to this article, the code section or amending returns or the benefits, contact your Marcum tax professional.