The IRC Sec. 179D is a tax incentive program that gives building owners and qualified builders/designers the chance to claim a tax deduction amounting to $1.80 per square foot for the installation of qualifying energy efficient systems and buildings. Tenants may also qualify if they pay for the construction expenses. The 179D tax credits apply to both new construction and retrofits.
Below are buildings that qualify for the 179D tax credit:
- Commercial buildings, such as parking garages and warehouses
- Multi-family properties that have four stories or more
- Government-owned buildings, like public libraries, state universities, and the like
- Industrial buildings
- Office buildings
- Apartment buildings
In order to be eligible for the credit, the energy-efficient property located in the USA must reduce their energy and power expenses by 50% or more, compared to the minimum requirements of ASHRAE Standard 901.1. If the property is unable to meet the 50% target saving, the provision allows for a $0.60 per square foot partial deduction for each of the following parts:
- Interior lighting systems that meet a 25% saving
- Heating, ventilation, cooling system, and hot water systems that meet a 15% saving
- Building envelope that meet a 10% saving
The deduction must not go beyond the cost of the qualifying property. The “Permanent Rule” and “Interim Rule” are other guidelines when it comes to partially qualifying property of lighting systems.
If the IRC Sec. 179D allows a deduction with regards to the energy efficient property, the basis of the said property will be deducted by the amount of deductions allowed.
Who Can Claim the 197D Tax Credits?
Commercial building owners are usually the ones that claim the 179D tax credit, but this tax incentive can also be claimed by architects, construction contractors, general contractors, engineers, design-build companies, energy or sustainability consultants, and others.
How Much Can You Claim With the 179D?
Any company or building owner can claim a tax credit of up to $1.80 per square foot. Building owners can also claim a partial deduction worth $0.60 per square foot when they update only one of the systems mentioned earlier. When you upgrade your interior lighting systems, for example, you immediately qualify for more under the Interim Lighting Rule.
How is the 179D Distributed to Architects?
Any private property owner can claim 179D tax credits so long as their building meets the energy requirements mentioned above. However, the biggest benefit for architects is that they will be able to allocate the deduction to the architect or institution that designed the technical provisions for the public property.
Because public properties are non-taxable, the deduction cannot be used, so the tax code allows this deduction to be given as an incentive to the architect or designer to focus on conserving and making public spaces energy efficient.
In the past, there have been requirements for business to pay a fee for signing 179D allocation agreements, but they these have been since backtracked. Architects are no longer required to pay a fee to local and state government organizations in order to qualify and receive an allocation letter. In case you are faced with such a requirement, contact the Engineered Tax Services right away.
In the last couple of years, a few city and state agencies have carried out processes to help determine who are qualified for the allocation and how to issue them. The 26 U.S.C & 17D tax code also clearly states that, “the allocation of the deduction [is] to the person primarily responsible for designing the property in lieu of the owner of such property.”
Other state agencies have also created their own systems for handling requests. In Utah, for example, state agencies require all architects and engineers on qualified projects to sign an affidavit stating that they will participate in the deduction or that they would rather opt-out from it. Doing this guarantees transparency and equal opportunity for everyone involved who usually share a portion of the tax deduction and certification fees.
How Do You Claim the 179D Tax Credit?
Building owners will have to get in touch with a qualified third-party contractor or professional engineer (PE) that utilizes licensed computer software to replicate the energy performance of the energy-efficient upgrades you have installed. The software then compares your energy performance model to another building that meets the minimum requirements of ASHRAE 90.1.
In addition, the third party will be carrying out a physical inspection of your property. They will then review and evaluate the results of the digital energy model and verify the findings afterwards. They will then sign papers that certify your building meets the requirements and that you qualify for the 179D tax credits.
Note: the qualified third party must be licensed in the state where your building is located.
The 179D tax credit also makes it possible for a government or non-profit owner to designate their deduction to the architect or contractor that has helped install the energy-efficiency improvements of the building. For them to receive the allocation of the deduction, the entity applying for the 179D deduction must submit two documents, which are:
- An allocation letter from the government organization or non-profit organization that owns the property stating that they confirm the allocation. This letter must be signed by the agency’s or organization’s official representative.
- A report confirming that the energy-efficient building qualifies for the 179D tax deduction.
Is It Possible to Retroactively Claim the 179D Tax Credit?
If you are a building owner, it is possible to claim the 179D tax credit retroactively to as far back as 2006. To do this, you have to file an accounting method change. Other organizations that plan to claim retroactively must file amended tax return.
In any case, it’s important that you claim your 179D tax credits in the same tax year as to when the project utilized.
If you want to claim your 179D tax credit you should get in touch with your tax professional and ask for more advice or assistance. A tax professional will be able to help you get the energy-efficiency upgrades you need so you can claim your tax incentive.