Energy efficiency tax deduction for architects, engineers and contractors

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Significant portions of the tax code – 1031 swaps, deferred interest, capital gains, etc. affects only part of the industry.

On December 28, 2020, the Section 179D Commercial Building Energy Efficiency Tax Deduction was permanent part of the US tax code in the Consolidated Appropriations Act of 2021. The deduction provides tax benefits to qualifying architectural, engineering and construction firms on certain projects designed for government-owned buildings that meet energy efficiency targets after construction is complete.

Building owners and operators have been urged to include energy efficient designs in their buildings for decades, and design and construction companies can now receive additional financial benefits for their part in a project through Section 179D. Before claiming the deduction, however, businesses should take note of some key rules and regulations.

What is the Section 179D Tax Deduction?

By claiming a Section 179D deduction, businesses – taxpayers – can receive up to $ 1.80 per square foot when they make efficiency improvements above certain energy thresholds to commercial buildings. The deduction of $ 1.80 per square foot also increases slightly each year to account for inflation.

With the recent update, architecture, engineering and construction companies can claim the deduction beyond 2021, allowing them to plan and generate significant tax savings from construction projects for government entities.

Who Can Claim a Section 179D Deduction?

The section 179D deduction can be attributed to engineering, architectural and construction entities that are responsible for the design elements of government-owned energy efficient buildings.

Since the owners of these public buildings are non-taxable entities, the deduction is then passed on to the main designers of the buildings – in this case, the engineering, architecture, construction entities and qualified energy service providers. of designers. The purpose of the deduction is to induce designers of public buildings to use energy efficient systems and components in construction projects.

An entity is considered responsible for the design elements of the building if it creates the technical specifications of a building. Any entity that installs, repairs, or simply maintains a property does not meet the definition of a designer for the purposes of this inference.

What particular aspects apply to architects and engineers …

Architecture and engineering firms are generally responsible for designing the technical specifications of a property. Therefore, they are likely to benefit from the section 179D deduction for improvements made to any of the following categories:

  • The building envelope
  • Heating, ventilation and air conditioning (HVAC) system
  • Lighting system
  • Sanitary water heaters completely replaced

… And what applies to building contractors?

A building contractor can benefit from the section 179D deduction if he contributed to the design or if he is obligated to participate in the design according to the terms of his contract.

For example, contractors engaged in a design-build contract with a government entity are more likely to benefit from the section 179D deduction than if they only operate as a general contractor.

Will Requesting Section 179D Deductions Trigger an IRS Audit?

It shouldn’t. Claiming the deduction as a designer of government-owned buildings will not automatically trigger an IRS audit, but it is important to take the correct steps to determine eligibility for the deduction.

The IRS Large Business and International (LB&I) division has included Section 179D in its list of so-called units of practice, which provides a framework for designers who may be eligible for the deduction.

The Section 179D IRS Practice Unit has published a knowledge-based document that outlines the steps the IRS would take when auditing Section 179D studies, so it is important that designers carefully review these guidelines.

Why is a survey necessary to claim a 179D deduction?

A business claims the section 179 deduction in the same tax year as when the building is put into service. If the entity meets the study requirements of Section 179D, it can report the deduction on its current year income tax return. In the event that the deduction was not applied on a timely filed tax return, there are ways to claim the deduction retroactively. Designers can go back over three open tax years to claim the deduction on amended tax returns. Building owners have the option of going back to tax year 2006 to apply Section 179D results through a change in accounting policy.

The deduction can be up to $ 1.80 per square foot, adjusted for inflation. A business claiming the deduction for a single system, for example, the HVAC system, would claim the credit of $ 0.60 per square foot.

In a Section 179D study, a qualified third party, separate from the designer taking the Section 179D deduction, uses IRS-approved energy software to model the building’s energy performance and improvements.

The energy model then compares the building’s performance with a benchmark building that meets relevant energy and electricity cost requirements, according to standards set by the American Society of Heating, Refrigerating and Air-Conditioning Engineers ( ASHRAE). The third party also makes a physical visit to the installation site.

The qualified third party must be a contractor or professional engineer (PE) licensed in the state where the building is located. The third party should review the energy model results and verify that the improvements meet applicable energy savings thresholds using ASHRAE standards.

They must also sign a certification document for the Section 179D deduction stating that they have reviewed the energy model and support the attribution of the deduction to its respective designer.

Taxpayers considering Section 179D should act quickly as only a limited amount is available for each project. The deduction is made on a first come, first served basis and once the total amount of $ 1.80 is allocated and used, it cannot be allocated any further.

While the Section 179D deduction may provide a significant cash flow opportunity for some architectural, engineering, and construction entities, companies suing them should consult their tax advisor or appropriate tax professionals to avoid claims. traps.

Kyle Sund, Enrolled Agent and Senior Director at Moss Adams, has been providing tangible asset incentive services to clients since 2007. His experience includes assisting clients with cost segregation analyzes, capital studies and credit. and incentives for renewable energies. He can be contacted at [email protected]. RL Widmer, CPA and Senior Tax Director at Moss Adams, has been a public accountant since 2008. He focuses on corporate and personal taxation. companies. He can be reached at (541) 225-6048.


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