FAQs About the Section 179D Tax Deduction
Did you know there is a federal tax incentive that rewards Architecture, Engineering and Construction (AEC) firms who design, build and renovate commercial buildings for government and tax-exempt entities?
Section 179D of the Internal Revenue Code (IRC) allows qualified companies who engage in qualified energy-reducing building activities to claim tax savings of up to $5 a sq. ft. for their efforts.
Here are some frequently asked questions about Section 179D and how this tax deduction can benefit AEC companies.
What is the History of Section 179D?
IRC 179D was created during the enactment of the Energy Policy Act of 2005. Congress recognized that companies responsible for the design, build, and construction of energy-efficient government buildings should be incentivized.
At first, this section of the IRC focused solely on the building owners. It was later expanded to include AEC firms that designed, built, or renovated government and tax-exempt buildings and included energy-efficient systems, such as HVAC, interior lighting, or building envelope systems, in their projects.
Who and What is Eligible for Federal Tax Incentives under Section 179D?
The IRS permits AEC firms to amend past tax returns (usually within the past three years) and claim the 179D Deduction, which could help free up cash flow. Designers of government-owned buildings must request an authorized allocation letter from the government building owner after the building or renovation is placed in service.
How Much Can AEC Firms Deduct in Their Tax Liability by Filing a Section 179D Tax Deduction?
Open Tax Years up to and including 2022: Section 179D offers a federal tax deduction ranging from $0.60 per sq. ft. up to $1.80 per sq. ft. for qualifying energy-efficient projects (new and renovations) in government and privately-owned commercial buildings.
Tax Year 2023: The newly enacted Inflation Reduction Act sets the 179D tax deduction range for projects completed and serviced between 2023 and 2032 between $0.50 and $5 per square foot depending on a variety of factors, including when the property is placed in service and whether certain prevailing wage and apprentice requirements are met on a project.
Additionally, the availability of the deduction has expanded. Tax-exempt businesses and certain Tribal entities may now allocate deductions to their AEC firm. Real Estate Investment Trusts (REITs) may also qualify for the 179D deduction as commercial building owners.
How Do AEC Firms Start the Section 179D Process?
Claiming the Section 179D deduction for energy-efficient tax savings is not as simple as you may think.
AEC firms who design, build and renovate government or tax-exempt commercial buildings must receive a signed allocation letter from the government or tax-exempt building owner.
These allocation letters have strict requirements under IRS rules.
Once the AEC firm receives that allocation letter, a technical analysis must be performed to demonstrate the commercial building achieved the qualifying level of energy efficiency to be eligible for the tax deduction.
This analysis requires both sophisticated modeling software and a visual site inspection from a qualified third party to verify what the energy modeling shows. The energy modeling software must be on the approved Department of Energy (DOE) software list.
ABGi is an Expert in the Section 179D Tax Deduction
Our energy, tax, and engineering professionals provide a turnkey service that includes allocation letter management (legal draft, GBO consultation, follow-up, retrieval), energy modeling, on-site visual inspections, certifications, and tax documentation the IRS requires to claim the 179D deduction.
Our turnkey service removes the administrative burden from our clients and allows us to manage and gather the required documents for the 179D deduction.
We perform a complete Section 179D study in accordance with the IRS guidelines, including:
- Collecting the required Allocation Letter from the proper government or public entity official.
- Perform the energy modeling required to certify the project.
- Calculate and document the deduction.
- Provide the site inspection and delivery of the certification report, as required by the IRS.
- Coordinate with your tax department or independent accounting firm.
Want to learn more about how to increase your AEC company's profit by claiming the 179D tax deduction?