Significant tax breaks for architects, engineers and contractors
when projects beat energy efficiency standards.

There is a little-known tax deduction that first became law with the 2005 Energy Policy Act. This deduction was further clarified by guidance from the IRS in 2008; rewarding energy-efficient public sector building design and putting tax incentive dollars into the pockets of architects, engineers and contractors. This incentive is slated to continue through December 31, 2013.

How the deduction is calculated.

The deduction, termed the "179D deduction," begins with calculating the square footage of the newly constructed or retrofitted public sector project. "Public sector" work is defined as educational facilities (K-12 and higher education), military facilities, and buildings used by local, state, and federal governments (or their political subdivisions).

The available tax benefits are broken down on a per square foot basis into three sections or systems: (1) heating, cooling, ventilation, and hot water systems, (2) building envelope and (3) lighting systems. If the completed building or improvement is at least 50 percent more energy efficient than the ASHRAE 90.1-2001 standard (as in effect on April 2, 2003), it may qualify for three separate $0.60 per square foot tax deductions for each system. There is a maximum deduction of $1.80 per square foot.

At a time when architects, engineers and contractors everywhere have been reeling from the depressed real estate market, qualifying taxpayers can look to the 179D deduction for significant benefits in the form of tax refunds.

History of the 179D deduction.

The 179D incentive began in 2005 as a private commercial project deduction which allowed developers of commercial projects to take a deduction of up to $1.80 per square foot upon the construction of more energy efficient buildings. While this incentive is still available for commercial building owners, there is also a little-known provision tucked into the 179D law that allows public agencies that own energy efficient buildings and improvements, and that may not be able to take advantage of the tax deductions, to assign the tax deduction to the project’s architect, engineer and/or contractor. Upon assignment, the assignee is treated as "the taxpayer" for purposes of the 179D deduction.

Key steps in claiming the deduction.

To utilize this deduction, the architect, engineer and/or contractor must retain a third party, with the signed approval of the property owner, to analyze and document the building’s energy performance levels. This 179D Energy study must be performed by a construction engineer familiar with the type and nature of the qualifying property and is best implemented by an accountant with expertise in this particular area of the tax law, such as BeachFleischman, PC. With the assistance of both certifying-engineering and accounting professionals, architects, engineers and contractors can secure their valuable 179D tax benefits.

For an architect, engineer and/or contractor to claim the 179D deduction, the owner of the building must agree in writing to allocate the tax benefit to one or more of the aforementioned parties. Then, a qualified building performance certifier (engineer) must examine and measure each building’s performance from firm records and archives. They must also perform a site inspection to verify that the building performs at least 50 percent better than ASHRAE 90.1. Firms may not self-certify projects. The certifying firm assembles the building performance data, and BeachFleischman implements the 179D study results as part of the impacted income tax returns.

Timing.

The statute of limitations requires the 179D deduction to be taken within three years of the project’s completion. If the deduction is not taken in the first year of eligibility, an amended return for the prior impacted year will most likely be required. Studies may now be performed for either new construction or retrofit improvements that were completed and placed in service since January 1, 2008.

How to get started.

Upon your request, BeachFleischman PC will perform an up-front feasibility study on the related property(ties) at no cost and help you determine if a 179D study is right for you. With up to $1.80 per square foot in tax deductions available, contact us today to get started.