Basic Things to Know About the 179D Tax Deduction

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179D Tax Deduction

Commercial property managers including designers of public construction projects that use certain sustainable construction materials may be eligible for the EPAct 179D tax credit under certain circumstances. 

As energy costs continue to grow, lowering those expenses has become a top goal in most public and private institutions. Source Advisors assists building owners and design companies in understanding and maximizing the benefits of this tax credit. 

A reduction of up to $1.80 per square foot is available under the Energy Policy Act (EPAct) for the installation of technologies that lower overall energy and power expenditures by 50% when compared to a building that meets the minimum standards set out in ASHRAE Standard 90.1-2007. 

The building exterior, interior lighting systems, heating, cooling, and ventilation systems, as well as hot water systems, are all considered eligible building systems.

Benefits That You Can Get From 179D Tax Deduction

Owners and designers of energy-efficient buildings that are eligible for a tax credit under Section 179D of the Energy Policy Act of 2005 can save a considerable amount of money. The tax deduction for lighting, HVAC, and the building envelope is $1.80 per square foot for building owners as well as designers of public projects, with a partial tax credit of $0.60 per square foot for designers of private projects.

Buildings That Are Eligible for Section 179D Claims

Along with other tax benefits, there are the requirements that should be fulfilled in order to qualify for either a full or partial deduction. Some of the requirements that you need to fulfill are that the building must be:

  • Operational after December 31, 2005;
  • Have installations that are integrated into the interior lighting systems, the HVAC, even the hot water systems, and the building envelope;
  • The calculations for energy and power consumptions are based on software approved by the IRS that compares the subject facility to a reference building of ASHRAE;
  • Additionally, the IRS offers Interim Lighting Rules as a substitute assessment technique. These guidelines allow for the use of watts-per-square-foot or lighting-power-density calculations in place of modeling for calculating energy efficiency.

The EPAct 179D Tax Deductions and How They Are Used by Building Owners

If your firm constructs, owns, or rents commercial properties, and you have installed or renovated the property to make it more energy-efficient, you may be able to deduct all or a portion of the expenditures connected with the installation or retrofitting on your federal income tax return. 

The firm or individual that incurs the construction-related expenses is often the one who benefits from the Section 179D deduction. Other than in the case of government-owned structures, this is usually the responsibility of the building owner. If a project is brought into operation after January 1, 2006, the deduction can indeed be claimed by completing Form 3115 or updating the tax returns.

Procedure for a company to claim the Section 179D Deduction

Upon receipt of a Section 179D report in the same tax year as the year the building is put into operation, a firm can claim the Section 179 deduction for that building. If the entity satisfies the conditions of the study, it may be able to claim the credit on its tax return for the current year. 

Taking into consideration inflation, the deduction might be worth up to $1.80 per square foot. A business claiming credit for a single system, like the HVAC system, would claim credit at such a rate of $.60 per sq foot of the declared space. Alternatively, if a firm submits an updated return, this can be done retrospectively.

Section 179D Assessment

A qualified third-party that is unrelated to the designer claiming the Section 179D tax benefit utilizes an IRS-approved energy modeling software to simulate the energy performance of the structure and renovations in a Section 179D study. 

The competent third party must be a licensed contractor or professional engineer (PE) in the state in which the structure is located. The third party must examine the energy model findings and verify that the changes meet the appropriate energy savings levels as defined by ASHRAE. Additionally, they must sign a Section 179D certification form saying that they have evaluated the energy consumption model and approve allocating the deduction to the appropriate designer.

Letters of Allocation for Section 179D

These documents certify that a structure complies with Section 179D’s energy and operating cost criteria. The letter of allocation shall be signed by the designer as well as an authorized representative of the government body. The government body may choose to assign the whole deduction to a single designer or to distribute it proportionately to numerous designers. 

When Does a Section 179 Deduction Reflect on a Tax Return for an Entity?

While a business should claim the benefit in the year the facility is put into operation, building owners can claim the benefit retroactively as far back as the 2006 tax year by submitting an accounting method change. 

In contrast to building owners, if an architectural, engineering, or construction company fails to declare the credit on their current-year tax return, they should submit an amended return in order to claim it. This can result in considerable administrative burdens, particularly if an organization wants to claim the deduction retrospectively for many years. 

If you believe your business may be eligible for the Section 179D credit, you must move fast since each project is limited to a certain amount. The designer should get a certified allocation letter from the government body, which must be signed by an authorized official.

How Does a Section 179D Deduction Reported by an Entity?

For the appropriate tax year, building owners record the Section 179D credit as a line item within other costs. Additionally, building owners should lower the property’s tax base by the value of the deduction. 

Designers, including such architects, engineers, or contractors, who are assigned the government-owned property deduction must additionally record it as a line item under other costs for the appropriate tax year. Designers are not required to record gross revenue or to decrease future credits and deductions by the amount allocated by Section 179D.