Tax Incentive Permanently Extended for Firms Designing Government Buildings
On December 27, 2020, President Trump signed into law the 2021 Consolidated Appropriations Act (Act). While much of the attention surrounding the Act has been on modifications to the Paycheck Protection Program and direct stimulus payments to taxpayers, the Act also enhances another tax incentive by permanently extending the energy-efficient commercial building property (179D) deduction—a lucrative tax incentive for architecture, engineering, and construction companies.
Originally enacted in 2005 and previously set to expire on December 31, 2020, 179D provides a tax incentive for firms involved in the design of energy-efficient building systems. The Act has made this previously temporary deduction a permanent deduction under tax law. 179D allows a deduction of up to $1.80 per square foot for the owners of newly installed energy-efficient building property. For qualifying buildings owned by federal, state, or local governments, the government agency is allowed to allocate that deduction to the firm or firms responsible for designing the building or related building systems. The government agency can allocate 100 percent of the deduction to a single firm or split the deduction among multiple firms. This allows the firm or firms named in that allocation to claim the additional tax deduction in the year the property is placed in service.
The following types of government-owned projects may qualify for 179D:
- Newly constructed buildings
- Additions to existing buildings
- Renovations in existing buildings
- HVAC, lighting, or building envelope upgrades to existing buildings
The 179D deduction can be up to $1.80 per square foot depending on how the building systems qualify. The total deduction can’t exceed the total cost of the qualifying property. There are two ways a building or building system can qualify for the 179D deduction:
- $1.80 per square foot for a total energy use reduction of 50 percent or more compared to the applicable American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) standards.
- Up to 60 cents per square foot for each of the following building systems that exceed energy reduction thresholds compared to the applicable ASHRAE standards:
- HVAC – 15%
- Lighting – 25%
- Building Envelope – 10%
Changes Beginning in 2021
The Act made three changes to 179D for energy-efficient building property placed in service after December 31, 2020:
- Since its enactment, 179D has been a temporary deduction that had to be extended based on temporary expiration dates. The Act made 179D permanent, giving designers of government buildings the opportunity to consider this incentive in their long-term tax planning without fear of another expiration.
- Beginning January 1, 2021, the deduction amounts of either $1.80 or $0.60 per square foot will be adjusted annually for inflation.
- The criteria to qualify for the deduction will be more stringent beginning in 2021. The applicable ASHRAE standards used to qualify property for 179D were changed from ASHRAE Standard 90.1-2007 to the most recent standard published two years prior to the start of construction of the subject property. This means future projects will need to be more energy efficient to qualify.
There are two documentation requirements for design firms claiming the 179D deduction:
- A letter from the government agency that owns the energy-efficient building property allocating the deduction. This letter must be signed by an authorized representative of the government agency. Obtaining this allocation letter is often the most 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 or that a government agency has decided to not provide 179D allocation letters.
This allocation letter needs to include specific information identified by the IRS, including:
- Name, address, and telephone number of government agency-authorized representative
- Name, address, and telephone number of the designer’s representative
- Name and address of the government-owned building on or in which the energy-efficient building property is installed
- Cost of qualifying property
- Date the qualifying property was placed in service
- Amount of the deduction being allocated to the designer
- Signatures of the representatives under penalties of perjury
- A certification report that the subject energy-efficient building property qualifies for the 179D tax deduction. This certification report includes an energy model performed showing the energy use reduction compared to the relevant ASHRAE standards. This model must be performed using a Department of Energy-approved software program for 179D. In addition, the certification requires a physical inspection of the qualifying building systems. This certification must be obtained from an individual unrelated to the design firm who’s properly licensed as an engineer or contractor in the jurisdiction in which the building is located and who represents in writing that he or she has the qualifications to provide the certification required or perform the inspection and testing.
Any person or firm involved in creating the property’s technical design and specifications may qualify for the 179D deduction. This group includes architects, engineers, design-build firms, general contractors, energy and sustainability consultants, and others. Individuals or firms engaged solely to install, repair, or maintain energy-efficient property wouldn’t qualify. If more than one designer is involved, the building owner can allocate the entire deduction to one designer or allocate portions of the deduction to several designers.
Prior-Year Projects Also May Qualify
If the government-owned building or building system was placed in service during a previous year, it may not be too late to claim the 179D deduction. In this case, an amended tax return would allow the design firm to claim the deduction and may even result in a refund for previously paid tax.
If you have been or are involved in a government project that may qualify for 179D, act quickly. BKD’s team of engineers and tax professionals can review the buildings in question, as well as your role in the design, to help you determine eligibility, request allocations, and provide certification reports. For more information, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.