179D Energy Policy Act of 2005

  • Forbes calls it the Wonder Tax Break
  • (for properties placed in service prior to December 31, 2017)

The Energy Efficient Commercial Building Tax Deduction is a federal tax incentive that allows owners of commercial property to deduct from their taxes up to $1.80 per sf for qualifying energy efficient property (for installs prior to December 31, 2018). It also contains a provision that allows public entities to give this tax incentive to the designer of the energy efficient property, since public entities do not pay taxes. This provision provides federal, state, and local entities a cost-effective way to improve energy efficiency in new or retrofit projects.

The American Institute of Architects the ACEC, & AGC led the charge for Congress to extend 179D (tax deduction) for 2014. These benefits can be assigned to architect/build design firms.

Tax payers no longer have to amend the return for 179D with the Revenue Procedure 2011-14, which allows taxpayers to claim this deduction back to 1/1/2006 without filing amended returns, instead file a Form 3115 (Change in Accounting Method) and will take the entire “catch up” deduction on the return that is being filed.

Ideal candidates for EPACT deductions are newly constructed buildings and renovation projects with at least 20,000 sf.

179D Highlights:

• A government agency (federal, state or local) can allocate the 179D tax benefits to the architect/engineer/contractor engaged in the design work of the building.

• The maximum deduction is $1.80 per square ft. and must be performed by an independent qualified engineering firm.

• The vast majority of new construction (and many energy efficient redos) will qualify or partially qualify for 179D just by meeting today’s stricter building code requirements.

• The three subsystems potentially eligible for this lucrative incentive are the building envelope; HVAC/hot water systems; and interior lighting systems.

When the owner of the building is a public entity, the person(s) primarily responsible for designing the specifications of the qualifying components may request an allocation of this deduction.

The designer will typically request a “letter of intent” so that he/she may begin the process of designing and certifying the property with the assurance that the public entity will follow through with the allocation afterwards.

Once the building is certified to meet energy requirements by a qualified individual using IRS-approved software, the agency may allocate this deduction by simply signing an allocation
letter. The agency must reduce its “basis” by the amount of the allocated deduction, which is a bookkeeping requirement typically taken care of by the agency accountants.

Background

The Energy Policy Act of 2005 created the Energy Efficient Commercial Building Tax Deduction, recognizing that a substantial portion of U.S. energy consumption is attributable to commercial buildings, and to provide building owners with a tax incentive to help offset the costs associated with enhancing the energy efficiency of commercial buildings. The provision, codified in 26 U.S.C §179D and therefore sometimes referred to as “179D”, allows the owner of a commercial building to deduct the installation costs of energy efficiency enhancements, up to $1.80 per square foot.

Moreover, to encourage the public sector to utilize these same energy efficient enhancements, Congress provided a federal, state, or local government owner of a commercial building an election to allocate the tax deduction to the primary person responsible for designing the technical specifications for the installation of energy efficient enhancements.