Does your company invest in a building system that is energy-efficient? If this is the case, you might qualify for an important tax deduction.
The Energy Policy Act 2005 is the foundation of the establishment of the 179D Tax Credits to lower the outlay of capital required to invest in energy-efficient building systems. There is a good chance that new construction projects will be eligible because the majority of current building code requirements call for significantly higher energy efficiency standards.
IRC Section 179D Tax Credits, which allows for a deduction for energy-efficient commercial buildings, has been included in the Consolidated Appropriations Acts of 2021, which was signed into law on December 27, 2020. As a result of this, the deduction has been made permanent.
What Is IRC Sec. 179D (17D Tax Credits)?
IRC Section 179D Tax Credits is a well-liked tax incentive that enables eligible designers and builders. The owners of qualifying buildings can claim tax credits of up to $1.80 per square foot to install energy-efficient systems and structures that meet the requirements of the section. If tenants make the construction expenditures, then they might qualify for the tax credits. The tax deduction is available for both brand-new construction and renovations to existing buildings. The following types of structures are considered qualified buildings: commercial buildings, which may include storage facilities and parking garages; multifamily properties that are at least four stories tall; and government-owned structures, which may consist of public universities, libraries, and other similar establishments.
For a property to be considered energy-efficient, it must be able to reduce the power and energy costs of a building that can be located anywhere in the United States by at least 50% in comparison to the minimum requirements that are outlined in ASHRAE Standard 90.1 in order to be eligible for the tax credits. The provision allows a provisional deduction of $0.60 for every square foot for each of the following components even if the target savings of 50 percent is not achieved:
- Interior lighting systems with at least a 25 percent saving;
- Heating, ventilation, cooling, and hot water systems with at least a 15 percent saving; and
- Building envelope of at least a 10% saving
The tax credit deduction cannot be higher than the qualified property’s purchase price. There are also alternative guidelines available, which are known as the “Permanent Rule” and the “Interim Rule,” for partially qualifying properties of lighting systems.
If a deduction is allowed under Section 179D Tax Credits of the Internal Revenue Code with regard to the property that is energy efficient, the basis of the said property will have the amount of the allowed deductions subtracted from it.
To be eligible for the 179D Tax Credits, the engineer, contractor, architect, or designer—any of whom can go back three years prior to receiving the benefit—must obtain a letter from the government agency that owns the building that allocates the tax benefit. This letter must be submitted in order to qualify for the deduction. In addition, all 179D projects are required to obtain independent certification. Moreover, it includes the modeling and visitation to the location by a licensed engineer.
For a property to be eligible for the deduction, it must first receive proper certification as achieving specific energy efficiency standards from licensed engineers or contractors. Only then will the property be eligible for the 179D tax credits. The qualified individuals will then conduct field inspections in compliance with the National Renewable Energy Laboratory or NREL guidelines. They will calculate the cost savings in energy and power using software that the Department of Energy has authorized.
An Example of the Potential Tax Savings Offered by Section 179D of the IRC
A commercial building that is 600,000 square feet in size has successfully finished an energy project that cost 19.5 million dollars. In most cases, the improvement is amortized over a period of 39 years, and this results in an annual depreciation of 50,000 dollars. With the eligibility for claiming the IRC Sec. 179D tax credits, added depreciation can be taken in the same year that the energy-efficient property is installed into service. This results in a significant benefit for the taxpayers:
600,000 sq ft multiplied to $1.80 benefit rate will be equal to $1,080,000
The basis of the property will decrease by $1,080,000 as a result of the property’s increased energy efficiency, and the remaining basis of $18,420,000 will depreciate over a period of 39 years.
Buildings Owned by the Government and Those Who Are Eligible
The deduction may be allotted to the person responsible for the design of the energy-efficient property assembled on or in buildings controlled by a federal, state, or local government agency. People working in design, architecture, engineering, construction, or energy consulting are examples of professions that qualify. The individual is responsible for obtaining an allocation letter from the relevant government entity in order to transfer the benefit successfully.
IRC Section 179D Tax Credits: How to File Your Claim
At the time that they file their taxes, taxpayers can claim the IRC Sec. Sec 179D deduction if they have received the appropriate certification and/or allocation letter. This is necessary for taxpayers to do so.
To qualify for the deduction for energy-efficient property that was put into service in earlier years, you need to comply with a different set of filing requirements.
In order to claim the deduction in a tax return for the current year in a retroactive manner, building owners can use Form 3115 or Change in Accounting Method to do so.
On the other hand, in order to claim the tax credits, eligible architects, builders, and engineers of government-owned buildings will need to make adjustments to their previous tax returns. As a result, they are only able to file for open tax years, which are generally three years after the date on which they file their taxes.
The Most Recent Information Regarding Standards for Energy Efficiency
In addition to being made permanent, another significant change that was made to Internal Revenue Code Section 179D was the addition of new metrics on energy efficiency standards.
The ASHRAE Standard 90.1-2007 was utilized in order to calculate the amount of money that can be saved on energy bills by properties that will be put into service on or before December 31, 2020. The Consolidated Appropriations Act 2021 provided the reference standard up to date so that it corresponds to the most recent ASHRAE version.