Born out of the realization that commercial buildings are responsible for a significant proportion of energy consumption in the U.S., §179D was added to the tax code under the Energy Policy Act of 2005. The goal of the provision was to encourage building owners in both the private and public sectors to implement energy efficient designs in new and existing construction. Section 179D enjoys broad support because it promotes sustainability, saves taxpayers money by promoting energy efficient improvements in public buildings, and harnesses significant tax savings for building owners and designers of environmentally-friendly upgrades.
The §179D deduction applies to improvements made on commercial buildings, apartments of four or more stories, and buildings owned by local, state, or federal governments. Buildings owned by Indian tribes and non-profits do not qualify. Section 179D is available for new construction and renovations to existing structures, as well as tenant-owned leasehold improvements. The maximum deduction allowed is $1.80 per square foot, which can amount to hundreds of thousands of dollars in savings for taxpayers. Specifically, §179D permits a deduction of up to $.60 per square foot for lighting, $.60 for HVAC, and $.60 for building envelope when the standard enumerated in ASHRAE 90.1-2001 is exceeded by certain percentages. Section 179D does not specify how the energy efficient improvements must be made; it simply rewards the end result, allowing for flexibility and innovation on the part of the building owner or designer.
Typically, the building owner takes the deduction at the time improvements are made. However, the government entities that own public buildings do not pay taxes and therefore have no use for deductions. They may allocate the §179D savings to the private entity, typically an architecture or engineering firm, that designed the upgrades. In these cases, the designers must have their work certified by a qualified third party firm to ensure that the upgrades satisfy the ASHRAE standards; designers cannot certify their own projects. They also must secure an allocation letter from the government entity assigning the deduction.
Despite the significant tax savings that it represents, §179D is often underutilized by architects and engineers who do not realize that their projects for government buildings qualify. If a design firm discovers that it completed a qualifying project within the past three years and did not claim the deduction, it may still reap the benefits by filing an amended return for the year of the project.
Unfortunately, §179D expired on December 31, 2014. It is part of a group of provisions known as tax extenders, which are not permanent parts of the tax code but are typically renewed retroactively each year. While it remains unclear whether §179D will apply to energy efficient projects completed this year, its bipartisan support and history of renewal indicate that there is a strong chance it will be extended for 2015. Because renewal is retroactive, building owners and design firms are encouraged to undertake energy efficient projects in accordance with §179D so that they will be poised to take advantage of this lucrative provision.
Contact CRG today for third-party certification and to capture the most federal tax benefits linked to your building projects. CRG provides Pro-Bono analysis.