The recently signed Protecting Americans from Tax Hikes (PATH) Act of 2015 included extensions of many popular tax incentives—but perhaps one of the most important for architecture, engineering and construction firms was extension of the Section 179D deduction.
Enacted by the Energy Policy Act of 2005, the Energy Efficient Commercial Building Property (179D) deduction provides a tax incentive for firms who are involved in the design of green building projects. Internal Revenue Code Section 179D allows a deduction of up to $1.80 per square foot for owners of new energy-efficient property. For energy-efficient buildings owned by federal, state or local governments, the agency can allocate the 179D deduction to the firm(s) responsible for designing the building or related building systems. This lets the design firm claim the additional tax deduction in the year the property is placed in service.
This provision was set to expire as of December 31, 2014, but the PATH Act retroactively extended the deduction for property placed in service during 2015 and prospectively extended it for property placed in service in 2016.
What Is This Incentive Worth?
The 179D deduction can be taken over the aggregate amount of the deduction for the building for all earlier years. A building can take the 179D deduction in one of two ways:
- $1.80 per square foot for an entire building if it exceeds energy reduction thresholds
- Up to 60 cents per square foot for each of the following systems that exceed energy reduction thresholds:
- Heating, ventilation and air conditioning
- Building envelope
What Has Changed?
Prior to the extension, a building qualified for the 179D deduction by reducing energy use as compared to the 2001American Society of Heating, Refrigerating and Air Conditioning Engineers (ASHRAE) standards. The PATH Act increased the energy use reduction requirement by replacing the 2001 ASHRAE standard with the 2007 ASHRAE standard for property placed in service beginning in 2016.
What Is Required to Claim the Deduction?
Design firms claiming the 179D deduction as allocated from a governmental agency must meet three documentation requirements:
- A letter from the government agency allocating the deduction, signed by an authorized representative of the agency. Obtaining this allocation letter can be a significant hurdle for design firms seeking the deduction—it’s not unusual for a design firm to request an allocation letter from a government entity only to find out the allocation has already been made to another firm involved in the project. This allocation letter needs to include specific information spelled out by the IRS, including:
- Name, address and telephone of the agency’s authorized representative
- Name, address and telephone number of designer’s representative
- Name and address of the government-owned building
- Cost of qualifying property
- Date the qualifying property was placed in service
- Amount of the deduction being allocated to the designer
- An energy model must be performed, using a U.S. Department of Energy-approved software program, showing the energy use reduction compared to the relevant ASHRAE standards.
- Independent third-party certification stating the energy-efficient property used in the model was actually installed in the building also is required. The certification requires a physical inspection of the qualifying building and must be signed by a locally licensed contractor or engineer.
Any person or firm involved in the technical design of the property may qualify for the 179D deduction. This can include architects, engineers, design-build firms, general contractors, energy and sustainability consultants and others. Individuals or firms solely responsible for installation, repair or maintenance of energy-efficient property would not qualify.
Prior-Year Projects May Qualify
If the government-owned building was placed in service during a previous year, the 179D deduction still may be available. An amended tax return may allow the design firm to claim the deduction, potentially leading to a refund for previously paid tax.
If you perform design work for government-owned buildings and need help determining your eligibility for 179D deductions, contact your BKD advisor.