Secure Your Section 179D Deduction

Section 179D Energy Efficient Commercial Buildings Deduction

What Is Section 179D?

Section 179D is an engineering-based tax incentive that is available for a range of commercial buildings. It allows building owners to deduct up to $1.80 per square foot for energy efficient commercial and industrial buildings, as well as some residential buildings above four stories. The Section 179D tax deduction is typically taken by the building owner, but can be allocated to the designers, architects, engineers and contractors of public buildings in some instances.

Clearly, it is an incredibly useful tax break that you may want to take advantage of—either for yourself or for your clients. However, you need to first be aware of eligibility requirements and what might get in the way of claiming the deduction.

We will look at some of those concerns shortly. First, let’s look at Section 179D in more detail to see if it might be suitable for your tax savings strategy.

Section 179D In Detail

Section 179D was created and implemented as part of the Energy Policy Act of 2005, in acknowledgment of the significant role commercial buildings play in U.S. energy consumption. The federal government sought to reduce energy consumption by incentivizing the design and construction of energy efficient buildings.

The Section 179D tax incentive allows the building owner to deduct from the costs of energy efficient improvements in three areas:

  • Lighting
  • Building envelope
  • HVAC and hot water systems

The Section 179D incentive can be used not only for new construction, but for upgrades and retrofits as well.

How Much Can Be Claimed?

The greater the energy savings, the greater the deduction up to the defined limits. The deduction cannot exceed the cost of the qualifying property.

In order to claim the maximum $1.80/SF, the building must meet or exceed a 50% savings in energy and power costs when compared to a building meeting ASHRAE Standard 90.1-2001 (for buildings and systems placed in service before January 1, 2016) or 90.1-2007 (for buildings and systems placed in service after January 1, 2016).

If a building doesn’t meet the overall 50% savings, it may qualify for a portion of the deduction:

  • $0.60/SF for lighting systems meeting 25% savings
  • $0.60/SF for building envelope systems meeting 10% savings
  • $0.60/SF for HVAC and hot water systems meeting 15% savings

It is also possible to partially qualify through the interim lighting rule, which allows for a prorated deduction for a 25-40% reduction in lighting power density (50% for factories).

The long and the short of it is, there are several different paths to the deduction. While this fine print makes the incentive more complicated, it also provides more opportunities for more building owners.

Eligibility

We’ve discussed the types of energy efficient improvements that qualify for the incentive. However, not every energy efficient building is eligible. For example, residential single-family homes do not fall under Section 179D.

To be eligible for this Section 179D tax deduction, there are a few factors which need to be taken into consideration, including:

  • The building must be within the scope of Standard 90.1-2001, which means that it is:
    • Primarily used for commercial purposes;
    • Used for industrial purposes;
    • Dormitory building;
    • Converted from other uses to be a commercial building;
    • Unconditioned garage spaces.

Some of the qualities and factors that might prohibit a building from qualifying for the deduction include:

  • Single-family homes;
  • Multi-Family homes with three or fewer stories;
  • Manufactured houses;
  • Buildings that do not use electricity or fossil fuels;
  • Religious buildings (as they are already tax-exempt).

Claiming the Section 179D Deduction

An individual taxpayer cannot prepare the claim on their own. A licensed engineer must complete a certification to validate the savings claimed on behalf of the owner.

The following is required by the IRS in order to claim the deduction:

  • Third-Party Inspection, Verification and Certification in accordance with Section 179D of the Internal Revenue Code
  • Energy modeling w/ DOE approved software
  • Allocation Letter (public buildings only)

The process of performing a Section 179D study tends to take between 4-6 weeks, and you can speed that up by getting the right kind of help on your side early on. There is certainly a strong argument for working with an experienced, trusted and valued speciality tax provider that specializes in engineering based incentives. With their help on your side, you will have considerably less stress associated with trying to claim on Section 179D, and you are much less likely to run into problems as you claim your tax benefit.

At Tri-Merit, we are highly experienced professionals in the field of engineering based tax incentives, including Section 179D. We can help you work out whether you are eligible and assist you throughout the entire process.

Our Process

We will gather data and provide a no-cost feasibility analysis. If you decide to move forward, we will follow IRS-prescribed inspection and modeling criteria to validate energy savings and potential tax deductions. Upon completion, we will provide the required third-party certification report.

Give Tri-Merit a call today and take advantage of your energy efficient improvements in every way possible.

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