In 2005, Congress passed the Energy Policy Act. The law created a tax incentive tied to the design or installation of energy-efficient interior lighting, HVAC, hot water or building envelope systems in commercial buildings. Section 179D of the Internal Revenue Code still allows qualifying businesses to deduct up to $1.80 per square foot for eligible projects placed into service between 2006 and 2016.
Projects and properties
If your company owns or leases a qualifying building (that is, one built or improved using energy-efficient methods during those years), you may be eligible for the deduction. Designers of government-owned buildings are also potentially eligible. Most important, contractors who have performed work on publicly funded projects such as schools, libraries, town halls, post offices and correctional facilities may qualify.
For property installed after December 31, 2015, the full energy-efficient commercial building property deduction is allowed for qualifying property installed (again, as part of the interior lighting, HVAC, hot water or building envelope systems) under an energy-reduction plan. A partial deduction may also be available.
4 questions to ask
Here are four questions to ask when considering the Sec. 179D deduction:
- Did you perform eligible work? During the time period covered by the law, all federal, state, and local government buildings are eligible, whether newly constructed or renovated.
- Is the building energy-efficient? To qualify for the deduction, the building need only improve on 2001 energy-efficiency standards set forth by the American Society of Heating, Refrigerating and Air Conditioning Engineers. (Most state building codes already require better performance.) The installation of any modern, efficient lighting, HVAC or water-heating equipment is likely to qualify, as is the use of low-heat transfer glass, shading, insulation or heat storage construction in the building envelope.
- Just how energy-efficient is it? An independent engineering firm must measure the building’s energy efficiency and, consequently, the amount of the tax benefit. It’s important to work with engineers who understand Sec. 179D.
- Do you have the required documentation? You’ll need a signed allocation letter from the government building owner, assigning the tax benefits to your company. This is a time-sensitive step, because others involved in the project’s design or construction may also be seeking the same letter and benefits. It’s a first come, first served scenario.
As of this writing, the Sec. 179D deduction was scheduled to expire at the end of 2016 — though it was still available for the applicable tax year. There is, however, reason to believe the provision will be extended and expanded going forward.
The American Institute of Architects and the American Council of Engineering Companies are advocating for the extension (and expansion of the benefit to $3.00/square foot). Congress is considering the matter.
Money on the table
Fulfilling the qualifications for the Sec. 179D deduction can be challenging. Under the right circumstances, the potential tax benefit is worth pursuing. So, if you believe you might be eligible, you’d be wise not to leave this money on the table. Ask your CPA for help understanding the rules involved and applying them to your construction company’s specific projects and circumstances.