Construction projects are complex endeavors with tight budgets and profit margins. As a builder or designer, you're constantly looking for ways to maximize value for your clients while also protecting your bottom line. One often-overlooked opportunity is the 179D tax deduction for energy-efficient commercial buildings.
Understanding 179D Tax Deductions
The 179D tax deduction, part of the Energy Policy Act of 2005 and updated by the Inflation Reduction Act, is a federal tax incentive designed to promote the construction of energy-efficient commercial buildings. It allows for a deduction of up to $5 per square foot for qualifying properties that have installed interior lighting, heating, cooling, ventilation or hot water systems that reduce the building's total energy and power costs.
Qualifying buildings include commercial buildings of any size, residential buildings of four stories or more. Even buildings owned by not-for-profit organizations and government entities can pass along the tax benefits to their designers. The deduction is available for new construction projects as well as renovations or retrofits of existing buildings.
The Benefits of 179D Tax Deductions for the Construction Industry
The 179D deduction provides a variety of financial, competitive and sustainability benefits to players within the construction industry, including:
- Increased profits: By lowering tax liability, 179D deductions directly enhance profit margins on qualifying projects.
- Competitive edge: The ability to tout 179D tax savings provides a competitive advantage when bidding for projects, especially those with environmental design goals.
- Tenant attraction: Eco-conscious companies are increasingly seeking to rent space in energy-efficient and sustainable buildings.
- Enhanced reputation: Completing 179D projects bolsters a company's reputation as an innovative, environmentally friendly firm.
- Sustainability promotion: By encouraging energy-efficient construction, 179D directly helps firms reduce their carbon footprint.
A real-world example of this can be seen in a case where a designer was hired to work on an energy-efficient building in Temecula, CA. Upon completion of the building, Engineered Tax Services conducted an EPAct energy evaluation to certify the lighting subsystem as energy efficient. This resulted in a total tax saving of $81,228 for the designer.
How to Claim
To claim 179D deductions, you must follow these key steps:
- Design and construct the building to meet the technical energy reduction requirements.
- Obtain third-party certification from a qualified professional like a licensed engineer confirming the energy reduction percentages.
- Complete IRS Form 7205 along with your tax returns to claim the deduction in the year the building is placed into service.
Additionally, it's crucial to avoid these common mistakes:
- Failing to properly model and measure energy use during design
- Missing deadlines for certification and deduction filing
- Forgetting to provide documentation to all parties able to claim the deduction
- Lacking ongoing maintenance to uphold energy performance levels
Why Choose ETS for Your 179D Deductions
When navigating the complex world of 179D deductions, it pays to have an experienced partner. ETS has spent over 15 years specializing in this field, with capabilities including:
- A team of in-house tax attorneys, engineers and industry experts to provide comprehensive guidance.
- A proven track record assisting commercial builders nationwide. Our clients appreciate our personalized approach, attention to detail and focus on maximizing eligible deductions.
- End-to-end support to simplify the process for you so that you can stay focused on your core business.
Conclusion
The 179D tax deduction is a powerful tool that can significantly enhance the profitability of your construction projects. By understanding this incentive and leveraging it effectively, you can gain a competitive edge in the market, contribute to environmental sustainability and improve your bottom line.
ETS is here to help you navigate this process. With our expertise and commitment to client success, we can help you claim the lucrative deductions and maximize your benefits. Contact us today to learn more about how we can assist you with your 179D deductions.
