179D Epact Tax Deduction

By claiming a Section 179D deduction, taxpayers can receive as much as $1.80 per square foot if they make efficiency improvements above certain energy thresholds to commercial buildings. The $1.80 per square foot deduction also now increases slightly each year to keep up with inflation.

On December 28, 2020, Section 179D was made a permanent part of the U.S. tax code in the Consolidated Appropriations Act of 2021. Now architecture, engineering, and construction companies can claim the deduction beyond 2021, so they can plan for and generate significant tax savings from construction projects for government entities.

Yes. The Section 179D deduction can be allocated to engineering, architecture, and construction entities responsible for the design components of government-owned, energy-efficient buildings.

Since the owners of these public buildings are nontaxable entities, the deduction goes to the primary designers of the buildings—the engineering, architecture, and construction entities that qualify as designers. The deduction incentivizes designers of government-owned buildings to utilize energy efficient systems and components within construction projects.

An entity is considered responsible for the building’s design components if it creates a building’s technical specifications. Any entity that installs, repairs, or maintains a property is not considered a designer for the purposes of this deduction.

No. If you claim the deduction as a designer of government-owned buildings, it won’t automatically trigger an audit from the IRS, but you must follow the right steps to determine qualification for the deduction.

The IRS Large Business and International division (LB&I) has created a Section 179D practice unit to provide a framework for designers that might be eligible to take the deduction. The Section 179D IRS practice unit has released a document that outlines the steps the IRS would take when auditing Section 179D studies.

You can claim the Section 179 deduction by commissioning a Section 179D study in the same tax year your building is placed in service. If your entity meets the requirements of the study, you can report the deduction on your current-year tax return.

The deduction can be up to $1.80 per square foot, adjusted for inflation. If you’re claiming the credit for only one system (for example, the HVAC system), you would claim the credit at $.60 per square foot. You can also do this retroactively if your company files an amended return.

Your company should claim the deduction in the same tax year as when the building is placed in service, but by filing an accounting method change, building owners can retroactively claim the deduction as far back as the 2006 tax year.

But unlike building owners, if an architecture, engineering, or construction entity misses the deduction on a current-year tax return, they must file an amended return to receive the deduction. A significant administrative burden can result, especially if an entity needs to retroactively claim the deduction for multiple years.

If you think your company could qualify for the Section 179D deduction, it’s important to act quickly, since only a finite amount is available for each project. The designer should receive a signed allocation letter from the government entity; it must be signed by someone within the government entity with the authority to do so.

If you’re a building owner, you should report the Section 179D deduction as a line item under other expenses for the applicable tax year. You should also reduce the property’s tax basis by the amount of the deduction.

Designers, such as architects, engineers, or contractors, who are allocated the deduction for government-owned property, also report the deduction as a line item under other expenses for the applicable tax year. Designers don’t need to recognize gross income or reduce future deductions by the amount the Section 179D deduction allocates.

IRC Sec. 179D lets building owners and eligible designers/builders claim a tax deduction of up to $1.80 per square foot for installing qualifying energy efficient systems and buildings. Tenants may be eligible if they make the construction expenditures. The tax deduction applies to both new construction and retrofits. Qualified buildings include:

• Commercial buildings, including warehouses and parking garages;
• Multifamily properties with four stories or more; and
• Government-owned buildings, such as public universities, libraries, etc.

To qualify, the energy efficient property must reduce the energy and power costs of a building located in the United States by 50% or more in comparison to the minimum requirements of ASHRAE Standard 90.1. If the 50% target saving isn’t met, you can get a partial deduction of $0.60 per square foot for each of the following components:

• Interior lighting systems meeting a 25% saving;
• Heating, cooling, ventilation, and hot water systems meeting a 15% saving; and
• Building envelope meeting a 10% saving.

The deduction can’t exceed the cost of qualifying property. There are also alternative guidance for partially qualifying property of lighting systems known as the Permanent Rule and the Interim Rule.

If a deduction is allowed under IRC Sec. 179D with respect to the energy efficient property, the basis of such property will be reduced by the amount of allowed deductions.

The Energy Policy Act of 2005, EPAct, created the Energy Efficient Commercial Building Tax Deduction; it recognizes that commercial buildings are responsible for a substantial portion of U.S. energy consumption. It provides 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 known as Section 179D, allows the owner of a commercial building to deduct the costs of energy efficiency enhancements, up to $1.80 per square foot. Section 179D is available for upgrades, retrofits, or new construction of lighting, HVAC/hot water, and the building envelope.

Energy-efficient commercial building property is defined as property that is:

1. Installed on or in any building located in the United States that is within the scope of Standard 90.1-2001 (Energy Standard for Buildings Except Low-Rise Residential Buildings) of the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America;
2. Installed as part of the interior lighting systems; the heating, ventilation, cooling, and hot water systems; and/or the building envelope; and
3. Certified as being installed as part of a plan designed to reduce the total annual energy and power costs of interior lighting systems, heating, cooling, ventilation and hot water systems of the building by 50% or more when compared to a reference building that meets the minimum requirements of Standard 90.1-2001, which came into effect on April 2, 2003.

If a public entity that doesn’t pay taxes, such as a public school, makes energy-efficient property expenditures, IRS guidelines issued in 2008 allow the deduction to be allocated to the person primarily responsible for designing the property.

Yes. The historical performance of existing buildings is not used in the energy savings calculations for the tax deduction. Like newly constructed buildings, retrofits and upgrades are measured against reference building models for determining the energy and power cost savings. These models are based, like those for new construction, on ASHRAE Standard 90.1-2001.

If a building doesn’t meet the whole-building requirement of a 50% energy savings, a partial deduction is allowed for each separate building system that comprises property; it must be certified by a qualified professional as meeting or exceeding the applicable system savings targets.

The savings targets are those that would result in a total annual energy savings of 50% for the whole building, if each of the separate systems met the system target. The maximum allowable deduction for each subsystem is $.60 per square foot.

The separate building systems are:

• Interior lighting system
• Heating, ventilation, cooling and hot water systems
• Building envelope

As of March 2012, the subsystem targets are 25% for interior lighting, 15% for HVAC and hot water, and 10% for the building envelope.

The interim lighting rule applies to properties where the installed lighting power density is reduced at least 25% below ASHRAE Standard 90.1-2001. The tax deduction varies linearly from $0.30/square foot at 25% savings to $.60/square foot at 40% savings. Warehouses are required to be 50% below Standard 90.1-2001. Lighting controls must comply with the mandatory and prescriptive requirements of Standard 90.1-2001; they must include a provision for bi-level switching in all spaces, except hotel and motel guest rooms, storerooms, restrooms, and public lobbies. Illuminance levels must meet the minimum requirements as set forth in the IESNA Lighting Handbook.

Bi-level switching is required when you use the interim rule, but not when lights are completed using energy modeling procedures.

Buildings that don’t use electricity or fossil fuel; single-family homes; multi-family buildings with three or fewer stories above grade; manufactured houses. Buildings owned by religious organizations don’t qualify because they’re tax-exempt.

A list of all DOE-approved modeling programs can be found at http://energy.gov/eere/

Yes, if two or more taxpayers participate in tax-deductible activities on or in the same building and the property is subject to the permanent rule. But the aggregate amount of the Section 179D deductions allowed can’t exceed the allowable amount for the specific tax deduction.

Not all tax professionals are aware of Section 179D benefits. Your tax preparer must follow all the guidelines as prescribed in the IRS Notices and employ (or act as) an independent third-party certifier.

Yes. The reference building models for determining the energy and power cost savings for new construction and retrofits of existing buildings are based on Standard 90.1. The historical performance of existing buildings is not used for the energy savings calculations for tax deduction purposes. 

You can take a tax deduction for a project started in 2005. Since the deduction has been made permanent, all current and future projects are eligible for the tax deduction. But a designer can only take a tax deduction for a municipal building project completed within three years of filing their latest federal tax return. 

Because qualification for the tax deduction is based on the building’s predicted energy performance, the predicted levels must meet the specified savings levels.

The tax deduction is the lower of (1) the value of the asset or (2) the value of the allowable tax deduction. The deduction cannot be for more than the amount spent on the equipment and associated installation labor. 

You can’t claim credit for renewable electricity, and you shouldn’t included renewably generated electricity in calculations or simulations. 

The taxpayer would have to meet the partial qualifying property requirements of the permanent rule. According to the permanent rule, the required 20% reduction from a Reference Building based on Standard 90.1 must be accomplished solely through energy and power cost reductions for the interior lighting systems. 

Since Standard 90.1 doesn’t cover buildings that are mostly refrigeration, the cold storage building would fall outside the scope of 179D tax deductions.