Does your company make investments in environmentally friendly and energy-saving building systems? If this is the case, you could potentially qualify for a tax deduction that is quite substantial.
The Energy Policy Act of 2005 laid the groundwork for creating the 179D Tax Credits, which are designed to reduce the amount of money that must be spent to invest in energy-efficient building systems. Because the vast majority of the requirements of the current building codes call for significantly higher energy efficiency standards, there is a high likelihood that new construction projects will be qualified.
The Consolidated Appropriations Acts of 2021, signed into law on December 27, 2020, included the IRC Section 179D Tax Credits, enabling a deduction for energy-efficient commercial buildings.
This provision was included in the legislation because it enables a deduction for energy-efficient commercial buildings. This has resulted in the deduction becoming permanent.
IRC Sec. 179 or 179D Tax Credits
IRC Section 179 of 179D Tax Credits is a popular tax incentive that enables qualified designers and builders to save money on their taxes.
Tax credits of up to $1.80 per square foot can be claimed by the owners of qualifying buildings for the installation of energy-efficient structures and systems that comply with the section’s requirements. If tenants incur construction costs, they may be eligible for tax credits.
The tax deduction is available not only for the construction of brand-new buildings but also for the renovation of existing buildings. The following kinds of buildings are considered to be qualified structures:
- commercial buildings, which can include storage facilities and carparks
- residential properties that are at least four stories tall
- government-owned structures, which can consist of public universities, libraries, and other establishments that are very similar to one another.
The property must be able to decrease the power and energy costs of a building that is located anywhere in the United States by at least 50 percent in comparison to the minimum requirements that are outlined in ASHRAE Standard 90.1 in order for it to be eligible for the tax credits. Even if the targeted savings of fifty percent are not achieved, the provision allows a provisional deduction of sixty cents for every square foot for each of the following components:
- Interior lighting systems with a minimum savings of 25 percent;
- HVAC systems with a minimum savings of 15 percent;
- Building envelope with a minimum savings of 10 percent
It is not possible for the tax credit deduction to be greater than the purchase price of the qualified property. For the purpose of partially qualifying properties of lighting systems, there are also alternative guidelines that can be followed. These guidelines are known as the Permanent Rule and the Interim Rule.
If a deduction is allowed with regard to the property that is energy efficient under Section 179, the amount of the allowed deductions will have the basis of the property in question reduced by the amount of the deductions that are allowed.
To be eligible for 179D Tax Credits, the engineer, contractor, architect, or designer must procure a letter from the government agency that owns the building allocating the tax credit. This letter must be dated no more than three years prior to receiving the credit. It is required that you provide this letter in order to be eligible for the deduction. In addition, it is necessary for each and every 179D project to obtain third-party certification. It also includes the modeling and site visitation by a licensed engineer.
Certification Requirements
For a piece of real estate to qualify for the deduction, it must first obtain the appropriate certification from licensed engineers or contractors stating that it has achieved particular energy efficiency standards. When this condition is met, and only then will the property be qualified for 179D tax credits.
After that, the qualified individuals will conduct field inspections per the guidelines provided by the National Renewable Energy Laboratory, also known as NREL. Using software that the Department has approved of Energy, they will calculate the savings in costs associated with energy and power consumption.
An Example of the Potential Tax Savings Under Section 179D of the IRC
Take, for example, an energy project for a 600,000-square-foot commercial building that cost $19.5 million that has been completed successfully. In most cases, the improvement is amortized over 39 years, which results in a depreciation of 50,000 dollars per year.
With the ability to claim IRC Sec. 179D tax credits, additional depreciation can be obtained in the same year that the energy-efficient asset is placed in service. The taxpayers will reap significant benefits as a direct result of this:
600,000 square feet multiplied by the benefit rate of $1.80 per square foot will equal $1,080,000.
Because of the increased energy efficiency of the property, the basis of the property will decrease by $1,080,000, and the remaining $18,420,000 will depreciate over a period of 39 years.
Government-Owned Buildings and Those Who Are Eligible
The person responsible for the design of the energy-efficient property installed on or in buildings controlled by a federal, state, or local government agency may be eligible for the deduction. Those who make their living in fields such as architecture, design, construction, engineering, or energy consulting, to name a few, are examples of people who fall into this category. In order to successfully transfer the benefit, it is the individual’s responsibility to obtain an allocation letter from the applicable government agency.
Filing A Claim For 179D Tax Credits
Taxpayers are eligible to claim the IRC Sec. Sec 179D deduction when they file their taxes if they have obtained certification and/or allocation letter. Taxpayers are required to comply with this requirement.
You will need to abide by a different set of filing requirements in order to be eligible for the tax credits for an energy-efficient property that was put into service in earlier years.
Building owners may use Form 3115, Change in Accounting Method, to retroactively claim the deduction or tax credits in a tax return for the current year.
On the other hand, to be eligible for the tax credits, qualified architects, developers, and engineers of government-owned building structures will need to modify the tax returns they have already filed. Thus, they are limited to filing for open tax years, which are typically three years after the date they file their tax returns.
