Contractors, Architects, and Engineers Benefit From Section 179D Extension
For nearly all of 2014, Congressional wrangling cast a shadow over the future of many tax laws that expired at the end of 2013. Finally, the Tax Increase Prevention Act of 2014 was signed into law in December 2014, providing a long list of one-year extensions. Of significant interest to the real estate industry is Section 179D, a provision offering tax deductions for reaching energy efficiency goals in qualified buildings.
Section 179D offers important tax deductions for expenditures related to energy efficient building components. The deduction caps at 60 cents per square foot for qualified investment in each of three targeted building systems: HVAC, building envelope, and lighting. The building’s energy performance must exceed strictly measured minimum criteria based on a 2001 efficiency standard. Over the past 10 years, technologies have gradually improved and qualification has become more readily achievable.
A decade of promoting energy efficiency through 179D
When our national energy policy began to move aggressively toward goals of resource diversification in the middle of the last decade, one leg of that policy sought greatly enhanced energy efficiency in both private and public buildings. We are now approaching 10 years since the passage of the 2005 Energy Tax Incentives Act that instituted the 179D rules. Changes have been made over the years, but the incentive has survived and improved. This long-term commitment to energy efficiency suggests the incentive will continue, and the benefits are most likely to hold steady or strengthen.
|U.S. building energy usage as a percentage of U.S. electricity consumption||70%|
|Estimate of building energy wasted||20%|
This year’s legislation extended the 179D benefits by one year (through December 2014), so projects placed into service in 2015 or later years may not qualify for this incentive. Prospects for another extension or an enhancement in 2015 appear good, although legislation may not get traction until late in the year.
“Designers incorporating energy efficiency in public works contracts will want to lay plans now to capture this benefit,” says Dave North, principal in CliftonLarsonAllen’s Federal Tax Solutions Group. “These incentives continue to be consistent with our long-term energy policy and are likely to endure in one form or another.”
Uncovering the opportunity
For private investors, 179D allows an immediate tax deduction in lieu of deferred depreciation deductions. It is available to the building owner and can add to depreciation benefits computed in conjunction with building cost segregations, repair studies, and other tax planning. There are sizable savings to be uncovered, but spotting the income tax opportunity usually requires someone to ask the right questions.
For public buildings, (those owned by federal, state, and local governments), the deduction is assignable by a government owner to the person primarily responsible for designing the property. Projects can spin off large assignable tax deductions to architects, engineers, or contractors who helped to achieve the efficiency thresholds.
For example, an energy efficient public school covering 85,000 square feet could spin off more than $50,000 in tax deductions to the architect or engineer responsible for the high performance HVAC system. If the lighting system also qualifies (which it often now would), the benefit can double. This unexpected tax savings imposes no costs on the government entity, but the allocations generally will not be made unless requested.
In a feature unique to 179D, designers can use the deduction even though they have no ownership or investment in the real estate. Though some designers may have trouble utilizing the deductions, in other cases the deduction value can exceed the contract profit.
“It takes the right project, the right design, and the right tax position for a client to get value from this law,” says Jennifer Rohen, a federal tax manager with CliftonLarsonAllen. “As the designer’s expertise develops in qualifying project work, deduction allocations can become a strategic resource for the client.”
How we can help
Private business owners who are upgrading their facilities or building new ones should consider 179D in their tax planning. These kinds of investments are often substantial, and evaluating 179D benefits should be high on the list, both for 2014 projects and beyond.
Public works projects can be a source of lucrative deductions for the project designers. For facilities placed into service in 2014, the recent legislation secures this opportunity. Although these benefits are not secure for 2015, planning for eventual extension of 179D to 2015 projects can keep your company one step ahead.
CliftonLarsonAllen professionals offer thoughtful insights on how to manage the tax and compliance opportunities of these evolving real property incentives.