179D Tax Deductions for Designers
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Overview
Many people in the building design and construction industry have heard about tax incentives for energy efficient buildings or renewable energy in the recently passed Inflation Reduction Act (IRA).
However, many designers are not aware that their own firms may be eligible for assignable tax deductions related to the energy efficient design of government buildings. This article explains how design firms can secure §179D tax deductions on public projects.
Disclaimer
The information and viewpoints expressed in this document do not constitute any form of legal or tax advice, nor any kind of formal opinion regarding incentive eligibility. Consult with qualified legal and tax professionals regarding your specific facts and circumstances.
Introduction
The §179D tax deduction has been around since 2006 and was enacted to encourage energy efficient practices and economic growth in commercial buildings. It has been updated over the years and was most recently made permanent as part of the IRA.
Designers should pay attention to a special rule created for government-owned buildings, which pay no tax and do not benefit from tax deductions. The rule states that designers can be assigned a §179D deduction from the owner of a government building. This may include tax-exempt organizations and tribal governments.
An eligible designer is “a person that creates the technical specifications for installation of energy efficient commercial building property for which a deduction is allowed under §179D… A person that merely installs, repairs, or maintains the property is not a designer.” Architects, engineers, contractors, consultants, or energy service providers could all potentially qualify; however, the deduction can only be assigned one time.
Ask your CPA or accountant: Will a “permanent deduction” lower my taxes?
§179D allows you to go back and claim past deductions on completed projects going back multiple years. The key is understanding which Projects are worth looking at. How much money is the deduction worth? How do you qualify? We cover these questions using examples and our most current tips/insights in the article that follows.
What’s it worth ($) to my firm?
It’s easy to estimate a range of §179D deduction based on the eligible Square Footage (SF) of a Project. There are then a couple of steps to clarify the potential cash value (after-tax) of the deduction for your firm in any given tax year. The steps are broken down below.
1) “Placed In-Service Date” and Energy Performance
The date that the Project was placed in-service determines the potential deduction amount. Placed in-service means when first used or opened for its intended function. Note that this can be before the final Certificate of Occupancy (COO) is issued.
1 Depends on efficiency of building systems & deduction rules for the tax year
2 If the Project meets IRS prevailing wage and apprenticeship standards, the deduction can increase by 5X
The range of deduction depends on achieving a percentage energy savings when compared to older ASHRAE 90.1-2007 baseline. Modern building codes will already exceed this older standard by a large margin, and so most Projects looking at §179D find themselves somewhere “in the money” with respect to energy qualifications.
Bonus: Projects placed in-service in 2023 or later may be eligible for a 5X bonus if they pay prevailing wages to applicable trade workers. Consider that many public Projects require Davis Bacon prevailing wages be paid; confirm this fact up front.
2) The applicable tax rate of the design firm
The §179D incentive is a tax deduction, not a dollar-for-dollar tax credit. Like all tax deductions, it reduces income before taxes. When getting a §179D deduction assigned from a qualified governmental entity, it is a more valuable permanent deduction vs. a temporary deduction or timing difference (a note for your tax person).
To estimate the cash value, multiply the §179D deduction amount by the expected tax rate (%) of the business for the year the Project was placed in service. The yearly tax rate can vary from 0% to over 30% over time depending on facts and circumstances.
Example #1 follows using the placed in-service date, square footage, and tax rate to estimate a §179D benefit. Note the Project met all prevailing wage criteria as well:
3) Subtract any fees for analysis and tax preparation
The net benefit will likely be reduced by the fees or costs for tax preparation. Most CPAs will not be able to file this deduction without the help of a specialized firm. On large projects, the benefit will typically far exceed the fees for tax preparation. Small projects may not produce enough benefit to justify the cost of claiming the deduction.
Generally, Projects over 20,000 SF can be profitable. Multiple Projects with similar facts are also excellent candidates since the analysis can be standardized.
Tip: Be cautious of engineering or tax advisory firms that offer §179D services for a findings-based fee. The taxpayer will bear all risk if the IRS denies qualification.
What’s the most important piece to qualify?
You must obtain a Letter of Assignment from the Owner or qualified Project Representative to claim the deduction. Contact the Owner and inform them your firm would like to pursue the deduction since it is intended for eligible designers of public buildings, and it is not applicable to them. Specifically, ask if they will:
1. Sign an allocation form once the document is prepared; and
2. Allow for a brief site inspection from a professional engineer.
Architects and design-build firms in prime contract roles are well-positioned to secure the deduction in Project negotiations, but sometimes they cannot use the deduction, and a qualified subcontractor may use it instead. It’s advisable to check with the primes if your firm is a subcontractor. The tax deduction can be assigned and split across multiple taxpayers, although many firms do not understand it well or care to explore it.
Tip: Since this is an entirely voluntary action for the Owner to assign the tax deduction, some firms will incentivize or reward a positive response, such as providing a donation of some of the cash value of the deduction. Some Owners may request an incentive. Quid Pro Quo is not supported or recommended by federal agencies.
How to get it?
Below are the steps to pursue the §179D tax deduction as an “eligible designer.” These steps assume that a consultant will help with the analysis and tax preparation, as it can be complicated, nuanced, and/or suffer from diminished benefit if not done properly.
1) Screen your Projects
Review projects from non-profit or government owners >20,000 SF. Consider looking at the largest projects first, going back 6-7 years.
2) Secure written approval from Owners
Use an approved template for the assignment letter from the IRS. Contact your Owners and ask them if they will sign off the deduction once the documentation is prepared, as well as allow for a brief site inspection from your consultant. Be prepared to explain why.
3) Engage a consultant
There are many niche firms that specialize in this deduction. A good consultant can quickly qualify a Project, complete the required energy calculations, execute the required site visit using a licensed engineer or architect, and prepare the necessary documentation to file the deduction with your tax professional. Reputable firms will also offer technical support in case of an IRS audit. The best firms can help you program these incentives into future projects.
What about private building Owners? (your other clients)
The same concepts and calculations above apply for tax-paying building owners. In their case, the deduction would be used as a form of accelerated depreciation versus the gradual depreciation of building systems that typically takes place over many years. A slightly different process is used to document eligible costs and assets for depreciation.
Just like with designers, this deduction may not be right for all owners. Ownership groups looking to quickly sell a property may not want to add this complexity. But in many cases, this tax deduction can be an excellent way to immediately access money for their investment in energy efficient equipment.
In Summary
Designers can claim tax deductions from public Projects, even retroactively.
Know how to value the deduction, as it can range from $0.30 / SF to $5.00 / SF.
Qualify that the Owner of a public Project is willing to assign §179D to your firm.
Use a consultant with technical experience and a track record of successful claims.
What about your project?
Contact us to get help exploring the §179D tax deduction for a past or current Project.
Contact G2 Energy Solutions today!
About Craig Green
Craig Green is the managing principal at G2 Energy Solutions, an energy engineering consulting firm based in Phoenix, Arizona. Over the last decade, Craig has prepared the §179D documentation for dozens of projects, resulting in millions of dollars in sustained tax benefits for his clients.
About Andrew Soulier
Andrew Soulier, LEED-AP® is the founder and CEO of Net Positive Advisors, a sustainability strategy and consulting firm also based in Phoenix. From 2010 to 2021, Andrew was a technical leader in Ernst & Young’s (EY’s) National Tax Credits & Incentives Practice, helping sustain more than $500M in federal tax incentives for a variety of clients.
Andrew and Craig have been collaborating for more than 15 years in the industry and frequently combine their energy modeling and tax expertise to support Project Teams.
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