The Section 179D tax deduction has been in place since 2006, and it was only recently that it was made a permanent legislation at the end of 2020. But what is Section 179D and how can building owners and property owners benefit from 179D tax credits? This article will explore some of the most frequently asked questions about this particular tax credit and if you want to know more, keep reading!
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Is your business involved in investments of energy-efficient building systems? If yes, you may qualify for valuable tax deduction with the 197D tax credits.
Introduced by The Energy Policy Act of 2005, the 197D tax deduction allows a deduction amounting up to $1.80 per square foot for energy-efficient commercial building property or EECBP, which includes the building envelope, its mechanical systems, and interior lightening.
The 179D tax deduction was created in hopes of reducing the initial cost of investing energy-efficient building systems. These days, the requirements for most building codes involve much higher energy efficiency standards, which means many new construction projects may qualify.
The maximum amount that a building owner or real estate owner can get from a 197D deduction is at $1.80 per square foot of qualifying property. For example, a commercial building with 100,000 square foot of qualifying space is eligible for $180,000 deduction.
The maximum deduction of $1.80 per square foot for a 50% reduction in total energy or power costs must not go beyond the amount equal to the cost of energy-efficient commercial building property in use during the taxable year. There is also partial deduction amounting to 60¢ per square foot for a 25-40% decrease in lighting power density (for warehouses 50%).
Energy-efficient improvements such as heating, cooling, ventilation, interior lighting systems, and hot water systems, especially when they reduce total annual energy/power costs by 50% qualify for the tax credits. Partial deduction is also available. Energy simulation is necessary to justify the deduction. A qualified third-party contractor or engineer will have to inspect and test them as well.
An independent third-party must complete an energy-efficient certification for you to claim the deduction. The certification includes both software and modeling that quantifies the deduction. A site visit to ensure that the components are installed properly as designed is necessary as well. Many tax experts can help verify whether the deduction is appropriate and correctly filed on your tax returns. They can help you obtain the certification for all qualified projects.
Properties that qualify for the 179D tax credits are as follows:
Those who qualify for the 179D tax deductions are:
The “designer” of a government owned EECBP qualifies for the 179D tax credits. A designer is referred to as the person/s or individual/s that creates the technical specifications for the installation of the EECBP. A designer can include engineers, architects, general contractors and subcontractors. But you shouldn’t confuse a person or individual that only repairs, maintains or installs EECBP as a designer.
It should be noted that projects can have more than one qualifying designer. This means that a qualified designer should pursue this deduction as early in the process as much as possible. This is to avoid another designer from claiming the deduction.
Privately-owned properties that placed in service or are in use as of January 1st, 2006, could qualify for the 179D deduction. The deduction is offered to building owners, and tenants, who pay for and are depreciating the energy-efficient improvements.
Compared to most deductions which are based on the amount that was spent, the 179D tax deduction is based mostly on affected square footages. Qualified candidates generally will have improvements with a square footage of at least 50,000 square feet. Numerous improvements, such as simple lighting fixtures to large-scale construction projects, qualify for this tax deduction. Other candidates for this tax deduction include regional and/or national chains with multiple locations.
In order to qualify and claim the 179D deduction, qualified individuals such as a third-party contractor or professional engineer (PE), must certify the energy savings of the said property. The third-party contractor or PE must be licensed in the same jurisdiction as the building in question. They may visit the property for inspection, and use software approved by the Department of Energy for energy modeling.
The reasoning behind the development and support for this deduction is an extensive engineering analysis, as prescribed by the IRS. If you delegate the task to a team of engineers and tax experts, you won’t have to worry about anything. They’ll make sure that you’ll have the maximum available deductions and properly certify tax deductions in accordance with IRS guidance. They can even help you claim deductions you’ve missed from prior years.
With a 179D Review, you get a 179D pre-certification review, including scoping estimate, plus a high-level analysis of the building (including HVAC and envelope systems, and reviewing building lighting for possible deductions) to see whether the it qualifies for the energy deduction.
You also get an estimate of energy deduction and Return on Investment (ROI) analysis to help you understand tax savings and benefits.
There are several ways 179D tax credits can affect your tax return and they are as follows:
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