If you are a business owner or professional contractor/engineer, you are aware of the high cost that taxes can incur on your business proceeds. Many legal provisions provide for tax cuts. The Energy Policy Act (2005), Section 179D, consists of a provision for tax deduction applicable to energy efficiency modifications to commercial buildings. Under this Section of the Federal Tax Code, a building may get a tax deduction of between $0.30 to $1.80 per square foot.
The maximum tax deduction is awarded to buildings that reduce their overall energy expenses by 50 percent and above. However, the percentage decrease in energy cost is also calculated based on the year a building was placed in service. Also, buildings that adhere to significant energy savings also get big deductions. For instance, between $30-60 per square feet may be awarded for lighting. An energy efficient heating, envelope, air conditioning system, ventilating, or light qualifies for the deduction. The energy simulations should comply with the power cost and energy savings requirements.
Who Qualifies for 179D?
To claim a deduction, a designer or building owner should have the energy savings approved by an independent firm. The deduction is awarded to retrofits and new buildings. Furthermore, the deduction is technology neutral- it does not favor any means of energy reduction used in a building.
If the building in question is the property of the government, like a library or school, the deduction will be awarded to the project’s engineers. The designer is the creator of the technical specifications used to install the qualifying building and the subsystems therein. These workers include engineers, architects, contractors, energy service companies, and environmental consultants. The designer will be awarded the deduction benefit whereas the government entity continues to receive the benefit of reduced energy costs.
Therefore, the candidates who can claim a 179D tax deduction are:
- Designers of energy efficient projects as per the definition of a designer provided above.
- Owners of commercial buildings that are retrofitted or newly constructed since 12/31/2005 will benefit from the 179D deduction. – Municipal buildings also qualify as per the 2008 provision of the 179D.
The qualified person should perform a model analysis of the structure, carry out a site visit, and issue a compliance certificate to the taxpayer. IRS states that a qualified person is not related to a taxpayer as per Section 45(e)(4).
IRS further holds that a skilled person should be an appropriately licensed contractor or engineer who has presented his/her qualifications in writing to the taxpayer. This means that an independent third party who fulfills the above conditions is qualified to conduct the study.
The 179D deduction is based on the energy efficiency of the building as per ASHRAE (American Society of Heating, Refrigeration, and Air Conditioning Engineers) 90.1-2001 baseline building. The three compliance pathways need to receive a 179 D tax deduction are as follows:
- Entire building qualification -50% power and energy cost savings as per the energy modeling;
- Partial qualification- HVAC, lighting, and envelope with authority and energy cost savings as per the energy modeling;
- Partial qualification- Lighting based on the interim light principle of reduction of installed lighting power.
Tax deductions are also based on building size, with the minimum building size requirement being 500,000 square feet. The following table shows examples of deductions you should expect to gain with a particular building size.
|Size in Square Feet||Deductions for Lighting($.30-.60/square ft)||Deductions for Building Envelope ($.60/square ft)||Deductions for HVAC ($60/square ft)||Total Deductions ($1.80/square ft)|
Why Should You Seek After This Benefit?
- Different Qualification Packages
You do not need to qualify for the whole building energy savings. You can qualify partly. The deduction is split into three parts: HVAC, interior lighting, and building envelope. Each one can lead to a deduction of up to $0.60/square foot. Therefore, if you install a new HVAC or modern lighting in your old building, you qualify for a partial deduction.
- The Bigger Your Space, The More the Deduction
Since deductions are awarded based on a square foot, large structures get bigger deductions. This can amount to huge savings for significant renovation or construction projects.
- You Earn Reductions Retroactively
You do not have to claim a deduction immediately. This means that if you own a commercial building and you are learning about these deductions right now, you can request them (without refilling taxes) for any improvements dating back to 12/31/2005.
If you are an architect, engineer, or contractor who dealt with energy efficient projects involving government buildings, a tax deduction may be claimed within three years from the time the building came into service. However, you will need to refill your taxes.
- Get Paid for Something that Benefits You
When a building is energy efficient, there are other advantages the owner stands to gain apart from a tax deduction. These include low energy costs, local, state, and federal tax benefits or incentives based on efficiency.
- Benefits Extend Beyond Building Owners
Although many people associate the 179D benefit with building owners, anyone who has helped renovate or design energy efficient buildings is eligible to benefit. The allocation of profits depends on the terms of the contract and could translate to big profits for engineers, contractors, and designers.
Ways of Maximizing the Benefits of 179D
- Hiring engineers and architects who are familiar with the tax implications of 179D – these are vital assets in ensuring the aspects of the building’s design are such that you rip the biggest tax benefit.
- Hiring tax lawyers and accountants who will give you calculations that ensure your plan offers you maximum benefits.
- Investing in massive projects since deductions increase based on the square feet of the building.
- Installation of energy efficient retrofits in your commercial building for partial benefits.
- Aiming for maximum deductions through implementing energy efficiency in your entire project.
If you are a building owner, engineer, contractor, or designer who is new to the 179D tax deduction, you need to consult a renowned professional firm to ensure you start benefiting from this provision. Walker Reid Strategies can help you claim this deduction and maximize it to the fullest to benefit your profession or business. If you need advice on this provision, do not hesitate to consult Walker Reid Strategies.