179D Tax Deduction for Architects, Engineers, ESCO’s: To Share or Not To Share?

To share the 179D Tax Deduction?… or…. Not to share the 179D Tax Deduction?  This is a common question that arises when we look at 179D Tax Deduction for Architects, Engineers, ESCO’s, Contractors and other designers of energy efficient government-owned buildings. Though it is a common practice to share the 179D Tax Deduction amongst multiple designers of the energy efficient property, lately we have seen a growing trend in our industry of the government agency requesting a share of the net tax benefit for the 179D Tax Deduction.

..…wait a minute…. isn’t the intent of the 179D Tax Deduction for Architects, Engineers, ESCO’s and other designers to go above and beyond in designing buildings to meet strict energy efficient standards by incentivizing them through a tax deduction?  Though this was the intent behind the legislation, many government agencies have taken the position that their power to allocate the deduction can be used as a revenue creator for their agency. Typically, what we see is a proposal requesting for a near 50/50 split of the net benefit between the designer and government agency, to have their cooperation in the 179D Tax Deduction process. For the designer, with the right amount of tax liability this may sound like a reasonable offering by the government agency, on its face it appears to be a reasonable split and at the end of the day you are ultimately going to have a relatively large net benefit regardless of the check being written to the government agency.. right? Though this may sound tempting, there are some things to consider before you whip out your checkbook and hand over a significant part of your 179D Tax Deduction.

-The GSA has already gotten into hot water for trying this approach. In May 2012 the GSA underwent investigation for allegations of requesting a kickback from designers/contractors without approving the means of creating revenue through as they claimed a share of the allocation of the 179D Tax Deduction back for their allocation. The GSA later revoked its policy of requesting the share of the 179D Tax Deduction.

-Is your company or the government agency violating any anti-augmentation laws by sharing the incentive with the government agency? Just like the GSA scenario it is possible that the State that the government agency is in, may have anti-augmentation laws in place that would not allow for that company to take revenue without having that method for creating revenue approved.

-Are you putting your firm at risk of an antitrust or anti-competition lawsuit by sharing the deduction? Depending on the scenario and size of your company sharing of the 179D Tax Deduction, could leave you and the government agency exposed to the possible violation of antitrust and anti-competition laws. When writing a large check to a government agency, it could put your competitors at a disadvantage in future competitive bid situations.

-Audit Risk, ultimately there is always the risk that the 179D Tax Deduction may be disallowed in an audit. If you end sharing the 179D Tax Deduction with the government agency and find yourself in a less than favorable audit situation a few years down the road it is doubtful that the government agency which was very quick to share the net proceeds of the 179D Tax Deduction with you would be ready to cut you a check back any issues that you may encounter in an audit.

It is important to consider all of the possible risks associated with sharing the 179D Tax Deduction with government agencies. If you choose not to share then communicate the reasons why to that agency and clearly explain that the risk far exceeds that reward. If they do not back down from their position of sharing the deduction, consider moving on to other projects in your portfolio.  If you decide to share, make sure you seek legal counsel prior to doing so.

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