Tax deduction extension for architects and engineers: Section 179D - Jaqueline Fackler

Jacqueline Moran Fackler, Grassi & Co.

This might be your last chance to take advantage of the Energy Efficient Commercial Buildings Tax Deduction, also known as Section 179D, as part of the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act—the extension previously given is set to expire at the end of this year.

In an effort to incentivize builders to surpass industry standards for energy efficiency, Section 179D was enacted as part of the Energy Policy Act of 2005. It allowed a deduction for commercial building owners and lessors for costs incurred to increase the energy efficiency of their buildings.  Whereas these costs would normally be depreciated over 27.5 or 39 years, they can now be deducted.   The added incentive to this deduction, and of particular interest to architects and engineers, is the ability for government owned buildings to allocate the deduction to the building’s designer.

Here is how it works:

• Eligible costs include expenditures for energy efficient commercial building property installed as part of the interior lighting systems; HVAC and hot water systems; or the building envelope. 

• The costs incurred must be part of a plan designed to reduce the annual energy costs for the building, or one of the three qualifying systems mentioned above. To achieve the maximum deduction of $1.80 per square foot of building space, the building must obtain a reduction in energy cost of at least 50% in total energy and power costs in comparison to that of the referenced building.   The deduction is further limited to the total cost of energy-efficient commercial building property placed in service during the taxable year.  

• Independent certification by a licensed engineer verifying the energy savings must be obtained to be eligible.

• Eligible buildings and expenditures include new construction of commercial buildings as well as for-lease apartment complexes that are four or more stories, as well as for commercial energy renovations.  The deduction is only for those buildings located in the United States.

While the maximum deduction is granted when energy savings is achieved for the overall building, a partial deduction is available when only individual systems reduce energy usage.  Typically, each of the three systems: interior lighting; HVAC and hot water systems; and building envelope are allotted 60 cents per square foot.  These individual systems must meet the reduction in energy use standards as established by the Secretary. 

While the deduction is usually that of the entity, the provisions allow for property owned by a Federal, State, or local government to allocate the deduction to a person who was primarily responsible for designing the property. This ability is a benefit unique to 179D in that it affords a deduction with no ownership or investment in the property.

As the average commercial building wastes roughly 30% of energy in a given year, the Commercial Building Tax Deduction was enacted into law in an effort to improve energy efficiency in commercial buildings, and is the first performance-based federal tax incentive aimed at such improvements. If the energy efficiency of commercial and industrial buildings, which generate a combined 45% of all U.S. greenhouse gas emissions, improved by just 10%, the collected savings would be $40 billion. Although there are no plans, as of yet, to make this law permanent, the results of such energy-efficiency efforts are so far reaching financially and environmentally, to continue them is not only smart business, it’s smart humanity.

Statistics quoted were taken from the following sources:

U.S. Environmental Protection Agency, ENERGY STAR program. “Useful Facts and Figures.” No date referenced. 1 June 2007.

Inventory of U.S. Greenhouse Gas and Sinks: 1990-2013. Table 2-5: CO2 Emissions from Fossil Fuel Combustion by End-Use Sector (MMT CO2 Eq.)” February 2015.

U.S. Department of Energy Better Buildings program. 19 March 2015. Total annual cost of energy in the commercial and insutrial sector: $400 billion. 10% of $400 billion = $40 billion.

Jacqueline Moran Fackler, CPA, is a senior manager of the tax services group at Grassi & Co., Jericho, N.Y.