The Section 179D Commercial Building Energy-Efficient Tax Deduction (Section 179D) is now permanent, providing potential ongoing tax benefits for architecture, engineering, and construction companies.
These entities can claim the deduction after construction is complete on designed projects for government-owned buildings. Before claiming the deduction, however, there are certain rules and regulations companies should be aware of based on timing and contract terms.
Below, learn how the Section 179D tax deduction could provide your company with significant tax savings as well as industry-related guidelines and restrictions.
What’s the Section 179D Tax Deduction?
Through claiming a Section 179D deduction, taxpayers can receive as much as $1.80 per square foot when making efficiency improvements above certain energy thresholds to commercial buildings. The $1.80 per square foot deduction also now increases slightly each year to account for inflation.
On December 28, 2020, Section 179D was made a permanent part of the US tax code in the Consolidated Appropriations Act, 2021. This change means architecture, engineering, and construction companies can claim the deduction beyond 2021—letting them plan for and generate significant tax savings from construction projects for government entities.
Can Engineering, Architecture, and Construction Entities Claim a Section 179D Deduction?
Yes. The Section 179D deduction can be allocated to engineering, architecture, and construction entities that are responsible for the design components of government-owned, energy-efficient buildings.
Because the owners of these public buildings are nontaxable entities, the deduction is then passed on to the primary designers of the buildings—in this case, engineering, architecture, and construction entities that qualify as designers. The purpose of the deduction is to incentivize designers of government-owned buildings to utilize energy efficient systems and components within the construction projects.
An entity is considered responsible for the building’s design components if it creates the technical specifications for a building. Any entity that installs, repairs, or maintains a property doesn’t meet the definition of a designer for the purposes of this deduction.
Learn more about Section 179D eligibility in our Alert.
Architects and Engineers
Architecture and engineering entities are typically responsible for designing a property’s technical specifications. As a result, they’re likely to qualify for the Section 179D deduction for improvements made to any of the following categories:
- Building envelope
- Heating, ventilation, and air conditioning (HVAC) system
- Lighting system
That said, a company can only claim the deduction for building design elements for which they’re directly responsible. For example, a mechanical engineering firm that’s only involved in the design of a HVAC system in a government-owned building would only be able to take the deduction for the portion derived by the HVAC system.
Construction Contractors
A construction contractor may qualify for the Section 179D deduction if they have input in the design or are obligated to participate in the design based on their contract terms. For instance, contractors that are engaged on a design-build contract with a government entity are more likely to qualify for the Section 179D deduction than if they’re only operating as a project manager.
Will Claiming the Section 179D Deduction Trigger an IRS Audit?
No. Claiming the deduction as a designer of government-owned buildings won’t automatically trigger an audit from the IRS, but it’s important to follow the right steps to determine qualification for the deduction.
The IRS Large Business and International division (LB&I) has included Section 179D in its list of so-called practice units, which provides a framework for designers that might be eligible to take the deduction. The Section 179D IRS practice unit released a knowledge-base document that outlines the steps the IRS would take when auditing Section 179D studies.