In 2005, Congress enacted the Energy Policy Act of 2005 to reduce commercial energy consumption in the Unites States. This legislation has many pieces, but one of the biggest incentives is the Energy-Efficient Commercial Building Deduction, or 179D. Every eligible company should claim this powerful incentive, but businesses are not always aware of it, even though the incentive has been in effect for over a decade. To help business owners better understand how the incentive works, the following are five facts to know about the deduction.
- AEC professionals qualify for the deduction—The original deduction in 2005 was only available to building owners who made improvements to increase energy efficiency. The deduction has been expanded to reward AEC professionals—architects, engineers or contractors—for work done to government-owned buildings. Government entities can give the deduction to companies that performed work on the HVAC or hot water systems, interior lighting or building envelope. The type of building does not matter, so long as it is owned by a public entity. The structure can be a public K-12 school, hospital, warehouse, parking structure, stadium or any other type of government-owned building. Architects, engineers and contractors can earn a deduction for up to $1.80 per square foot of the building.
- Buildings do not have to be LEED certified to qualify—Leadership in Energy and Environmental Design (LEED) takes into consideration more elements of the building (construction materials, water fixtures, location, etc.) than the 179D deduction. LEED certification is much harder to meet than the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) standards, which the IRS uses to determine how renovations, retrofits and design make energy improvements to a building. For this reason, government-owned buildings can qualify for the deduction even if they are not LEED-certified. Likewise, a LEED-certified building almost always qualifies for the 179D deduction.
- The deduction is technology-neutral—The legislation does not make any rules regarding what type of technology should be used to reduce the building’s energy usage. The only requirement is that the work involve HVAC or hot water systems, interior lighting or the building envelope. A wide-range of work can qualify for 179D: installation of variable-frequency drive (VFD) controls or lighting occupancy sensors, geothermal wells, insulation of the envelope or window glazing. This neutrality allows different types of installations to qualify, and encourages further innovation in energy efficient technologies. Advanced energy modeling software is needed to maximize the deduction with specific and accurate calculations on the energy usage saved.
- The allocation letter process is not one size fits all—To receive the 179D deduction, AEC professionals must procure an allocation letter from the government entity that owns the building. Because the deduction is available at the federal, state and municipal levels, each entity that owns the building can have a different allocation process in place. Any architect, engineer or contractor who has worked on government projects knows how vexing bureaucracy can be, and this process can be challenging for companies and tax specialists who do not understand the allocation. Therefore, it is crucial for AEC firms to partner with a tax consultancy that understands how to write allocation letters and have them signed.
- Though 179D has not yet been renewed, there’s still time to claim the deduction—Businesses still have time to claim the deduction though many tax previsions, including 179D, have not yet been renewed by Congress. The incentive is easier to claim than others because it rewards work previously done. AEC firms have until 2019 to claim work done in 2016, and can file amended returns to receive a tax refund for work before 2016 in any open tax years. The new administration and Congress have made comprehensive tax reform a major legislative goal for this year, and many analysts have a positive outlook on this deduction’s chances for renewal.