Tax incentives for buildings are typically associated with a taxpayer and the actual owner of the building, but federal tax incentives actually allow designers of government-owned buildings the ability to allocate and transfer a tax deduction to their tax return. The incentive is tied to a special tax incentive outlined in Section 179D of the tax code regarding energy efficient buildings.
Taxpayers wishing to take advantage of the incentive on buildings they own are accelerating a tax deduction more quickly and, therefore, a timing difference. However, designers of government buildings are taking a tax deduction they would not otherwise receive, making it a permanent difference. The intent of the tax incentive is to create more energy efficient buildings and provide lower energy costs. Since recognizing a tax deduction has no use for a government entity, the law allows for an allocation of the tax deduction to those designers involved in the technical specifications of the government-owned building. While many buildings qualify for incentives, an allocation form must be signed and the building must receive the required inspection and documentation by a third-party certifier in order to take the deduction.
What is Section 179D?
Section 179D allows for a current deduction of up to $1.80 per square foot for energy efficient commercial building property placed in service during the year either as part of new construction or as part of an improvement or addition to an existing building. In order to qualify as energy efficient commercial property, the property must be:
- Not for personal use.
- Located within the U.S.
- Installed as part of the three primary building components:
- Interior lighting systems; or,
- Heating, cooling, ventilation or hot water systems; or,
- Building envelope.
- Certified in accordance with Internal Revenue Service (IRS) standards as being part of a plan designed to reduce the total annual energy and power costs with respect to these systems by 50 percent or more in comparison to a reference building meeting the minimum requirements under the law using methods of calculation as prescribed by the IRS. In addition, partial deductions are allowed; therefore, even if you only partially qualify, you can receive a benefit.
Who can qualify for government-owned buildings?
Certain eligible designers and builders of governmentowned property can potentially qualify for Section 179D, including architects, engineers, contractors, environmental consultants and energy service providers. The deduction can be claimed when energy efficiency enhancements have been included in the construction of a new government-owned building, or when existing government-owned buildings have undergone energy efficient renovations or improvements. Per Section 179D, the tax deduction on government-owned buildings can be allocated to the designer and/or builder who is involved in the technical specifications of the improvements.
Potentially qualifying property includes governmentowned buildings at the federal, state or local level, such as schools, courthouses, airports, military bases, universities or post offices.
On Dec. 20, 2019, the Omnibus Appropriations Bill H.R. 1865 was signed into law, which provided an extension for the Section 179D energy efficient building deduction, now allowing projects placed in service in 2018, 2019 and 2020 to be certified for qualifying energy tax incentives. The Section 179D tax deduction was originally passed as part of the Energy Policy Act of 2005; on Feb. 9, 2018, the Bipartisan Budget Act was also passed to provide a oneyear retroactive extension for Section 179D for projects placed in service in 2017. This retroactive extension is good news for those in the construction and real estate space who may have previously been unaware of Section 179D and its advantages, or simply had not yet acted to take advantage of the deduction for any qualifying property.
As with any tax incentive, there is a checklist of issues that must first be addressed, which may involve tax analysis, certification and qualified onsite inspection. For government-owned buildings to qualify for any deductions under Section 179D, the property must be inspected and confirmed for qualification by an independent third party. An official allocation letter is also required for any government entity to transfer tax benefit to a qualified designer or builder.
As such, navigating Section 179D for government-owned buildings can require the management of multiple professionals, which can a be costly and time-consuming process, requiring the help of a trusted advisor. If you have questions on Section 179D and its application, including the logistics required to qualify for the deduction, please contact us.