As the year enters its fourth quarter, an important deadline is looming for commercial building owners and designers seeking opportunities to minimize their tax burdens: the §179D deduction for energy-efficient buildings is currently due to expire on December 31, 2020. As one of the “tax extenders”—a group of temporary tax incentives that are only authorized for a limited amount of time before they are once again subject to renewal by Congress—the §179D deduction has a history of expiring every few years. Most recently, the Further Consolidated Appropriations Act of 2020 brought it back to life for projects completed between January 1, 2018 and December 31, 2020.
If you have recently installed energy efficiency measures in your commercial building, or if you are an architect, engineer, or other professional who has designed such measures for a government-owned building, now is the time to determine whether your projects qualify for the §179D deduction. Here is an overview of this valuable incentive:
What is the §179D deduction?
Buildings are responsible for approximately 40 percent of all energy used in the U.S. The §179D deduction was introduced under the Energy Policy Act of 2005 (EPAct) with a goal of incentivizing commercial building owners to take steps to curb their energy consumption. Specifically, the deduction is worth up to $0.60 per square foot for qualifying energy-efficient improvements to a building’s interior lighting systems, $0.60 per square foot for improvements to the HVAC and hot water systems, and $0.60 per square foot for improvements to the building envelope—for a total of $1.80 per square foot for the whole building. Given the large size of many commercial buildings, this can translate to hundreds of thousands of dollars in tax savings.
The deduction is available for new construction and retrofits to existing buildings, which may include:
- Office buildings
- Industrial facilities
- Retail spaces
- Apartment buildings with four or more stories
Who is eligible for the §179D deduction?
Commercial building owners may claim the §179D deduction for qualifying energy efficiency measures that they install in their buildings. In addition, primary designers—such as architects, engineers, contractors, and green building consultants—may be eligible for the deduction when they design or implement qualifying measures in government-owned buildings, including schools, libraries, transportation facilities, and many others. Since state, local, and federal government entities are tax-exempt, they are not able to benefit from the deduction, so they may transfer it to the primary designer via an allocation letter.
How to claim the §179D deduction
To qualify for the deduction, energy efficiency measures must meet or exceed the standards of ASHRAE 90.1-2007 by certain percentages. In order to show that these standards have been satisfied, projects must be certified by a third party using qualified software. The taxpayer will likely need to provide thorough documentation of the project, including architectural plans, descriptions of the fixtures that were installed, and scope of work information.
Will the §179D deduction be renewed after 2020?
As of September 2020, it remains uncertain whether the §179D deduction will be renewed at the end of the year as it has been many times in the past. Considering that the CARES Act—the massive spending package passed in March as a way to provide relief for individuals and businesses impacted by the COVID-19 pandemic—significantly deepened the federal deficit, lawmakers may be hesitant to renew the tax extenders this year. The fate of these incentives may also be affected by the results of the November elections. Given this uncertainty, it is crucial for building owners and designers to act now to determine whether their projects may entitle them to substantial tax savings through the §179D deduction.
At Capital Review Group, our team offers the combination of tax, engineering, and commercial property expertise needed to help building owners and designers maximize their tax savings through the §179D deduction. For example, we recently helped an architecture firm receive a deduction of over $160,000 based on a design that the firm completed for an elementary school. By taking advantage of the §179D deduction and other strategies available to commercial building owners, such as Cost Segregation, our clients routinely capture six- or seven-figure tax savings. Contact us today to schedule a consultation!