Architects & Engineers Handbook to Claiming the §179D Deduction

Internal Revenue Code §179D provides financial incentives to architects, engineers, and design-build contractors for energy-efficient design work for tax-exempt buildings.

Many businesses are concerned about prospective changes to the tax law, particularly concerning significant sections like carried interest, capital gains, 1031 exchanges, and more. Thanks to a move by Congress, an architect and engineering firm-often-ignored tax technique became permanent in late 2020.

The Consolidated Appropriations Act of 2021 permanently incorporated the Section 179D Commercial Building Energy-Efficient Tax Deduction into the United States tax code on December 28, 2020. The deduction offers tax benefits for eligible architects, engineering, and design-build construction firms working on specific specified projects for government and non-profit owned buildings that meet energy-efficiency requirements.

Energy-saving design and construction firms can now gain additional financial benefits for their work through Section 179D, adding to the decades-long incentives by incorporating such ideas into their structures.

However, architects, engineers, and design-build companies should know a few essential guidelines before claiming the deduction.

What is the eligibility for a §179D deduction, and is it applicable to architects and engineers?

Engineering, architectural, and design-build companies in charge of the design elements of government and non-profit owned, energy-efficient buildings are eligible to deduct under Section 179D.

The significant designers of the structures—in this case, the engineering, architectural, construction, and energy service companies (ESCO) that meet the requirements for qualifying as designers—receive the deduction because the owners of these public buildings are nontaxable entities. The deduction’s primary goal is encouraging government and non-profit owned building designers to incorporate energy-efficient systems and materials into their designs.

If an entity develops a building’s technical requirements, it is deemed accountable for its design elements. For this deduction, a company that only installs, fixes, or maintains a property does not fit the criteria of a designer.

What unique characteristics apply to engineers and architects?

The foremost duty for designing energy-efficient homes and technical standards is with architecture and engineering firms. Consequently, if they make changes to any of the following areas, they probably qualify for the Section 179D deduction:

• Building envelope
• HVAC system (heating, ventilation, boilers, chillers and air conditioning)
• Lighting
• In some instances, if the construction contractor has input into the design or is required to engage in the design by the terms of their contract, they may be eligible for the §179D deduction.

Why does claiming a §179D deduction require a study?

The business claims the §179D deduction in the same tax year the building was used. The entity may report the deduction on its current-year tax return provided it satisfies the requirements of the Section 179D study. There are ways to claim the deduction retrospectively if it was not applied on a timely filed tax return. Designers may claim the deduction in modified tax returns by going back three open tax years.

In a §179D analysis, the building’s and the improvements’ energy performance are modeled using IRS-approved energy software by a qualified third party, who is not the designer, deducting the §179D costs.

The American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE) standards evaluate the building’s performance with a reference building that satisfies pertinent energy and power cost requirements. Additionally, the third party completes a site visit to the institution.

A competent third party is required to be a professional engineer (PE) or contractor with a valid license in the state where the building is located. The third party must examine the energy model’s output and confirm, using the ASHRAE standards, that the modifications meet the relevant energy-savings levels.

In addition, they must certify in writing that they have reviewed the energy model.

Conclusion

Architecture, engineering, and design-build companies may find a significant cash-flow opportunity with the §179D deduction. Walker Reid emerges as a strategic ally, offering proficiency in §179D Certifications and serving as a guide in the intricate landscape of sustainable design. By infusing designs with sustainable principles and partnering with experts, architects can transcend the ordinary, creating structures that are not only green but also fiscally rewarding.