How Can Designers Benefit from the Section 179D Deduction for Energy-Efficient Buildings

The Section 179D deduction offers significant benefits for designers focused on sustainability and implementation of energy-efficient commercial buildings. Here's a detailed exploration of how designers can qualify for this deduction, what projects are eligible, and the financial benefits involved.

Understanding the 179D Deduction

Section 179D, also known as the energy efficient commercial buildings deduction, is available to designers on projects that incorporate energy-efficient HVAC and hot water, interior lighting, or building envelope systems. Designers can receive the tax deduction on government or tax-exempt owned projects by obtaining an allocation letter. New construction, renovation, and addition projects are eligible for this tax incentive program. Most designers are able to claim the benefit for projects completed in the last three years, in addition to current and future work.

179D Calculation and Financial Benefits

As a result of the Inflation Reduction Act, there is now a base and bonus deduction rate available for a project. By meeting prevailing wage and apprenticeship requirements, a designer may be eligible for a bonus deduction rate of up to $5 per square foot. If these requirements are not met, the base deduction rate can be captured at a maximum rate of up to $1 per square foot.

To qualify for 179D, a designer must achieve at least 25% energy cost savings through the energy modeling analysis. This energy savings percentage determines the eligible deduction rate. Additional value is captured for each energy savings percentage point above the 25%, with the max deduction rate eligible by hitting a 50% or higher savings.

The total 179D deduction is then calculated by multiplying the deduction rate (dollars per square foot) by the conditioned area of the building. This deduction, however, cannot exceed the overall cost of the project.

Example:

• Building Type: K-12 School
• Square Feet: 100,000 sq ft
• Project : A renovation to the existing building that includes new HVAC rooftop units and an interior lighting upgrade to LED fixtures.
• Placed in Service Date: June 2023
• Deduction Allocated To: Engineering firm of the project 

What is the Definition of a Designer?

For the purposes of the Section 179D deduction, a "designer" is broadly defined to include anyone who creates the technical specifications for the installation of energy-efficient systems in commercial or high-rise residential buildings. This definition encompasses a variety of professionals within the construction and building design industries. 

Types of Designers Eligible for the 179D Deduction

• Architects - Professionals who are primarily responsible for the overall design and meeting the building owners energy-efficiency needs.
• Engineers - This can include mechanical, electrical, and structural engineers who design the building’s HVAC and hot water, lighting, and building envelope systems to improve energy performance.
• Contractors - Construction managers, contractors, or general contractors who have expertise in design-build, design-assist, or direct-to-owner contracts for systems that impact the building's energy efficiency.
• Environmental Consultants - Experts who assess environmental impact and integrate sustainable building design to meet energy efficiency standards.
• Energy Service Providers - Organizations that identify, design, and execute energy conservation measures that increase the energy performance of the building.

What is an Allocation Letter?

For a designer to be eligible to receive the 179D deduction, they must receive an allocation letter. An allocation letter is a formal document signed by the property owner and designer that is specific to the eligible project. This letter acts as a permission slip for the designer to be able to claim the deduction. Required information such as the building address, completion date, project cost, and total 179D deduction amount must be included and confirmed by both parties.  

Who can Allocate the Deduction to the Designer?

Designers are able to obtain an allocation letter and claim a 179D deduction when the building owner is either a government or tax-exempt organization, who cannot directly benefit from a tax deduction due to their tax-exempt status. 

Eligible public entities include various government bodies like:

• Public K-12 schools
• Public universities
• Military and federal entities
• Airport authorities
• Local/city/state governments

Tax-exempt entities that can allocate the deduction encompass:

• Non-profit universities
• Hospitals
• Churches
• Other similar organizations

It is the building owner’s choice as to which designer receives an allocation letter to claim the 179D deduction. The building owner can choose to give an allocation letter to a primary designer or allocate a portion of the deduction to several designers. A building owner may not allocate to an organization that was not related to the project or does not meet the designer definition outlined above.

Compliance Requirements

Before a designer can claim the 179D deduction, there are additional documents and steps that must be completed.

• Energy Model: To determine the energy savings, an energy model must be created utilizing Department of Energy approved software. This analysis should include a proposed model that depicts the existing building and a reference model that represents that same building if built to ASHRAE 90.1 minimum standards.
• Site Visit: A site visit must be conducted by a qualified individual, typically a professional engineer, to confirm that the equipment has been installed, is operational, and the specifications match the inputs for the energy model.
• Certification: A qualified individual must also verify that the energy model and site visit were done in accordance with the Section 179D code requirements through a formal certification.
• Form 7205: The 179D deduction must be applied to the return utilizing Form 7205, a worksheet specifically designed for this tax incentive. Details regarding the property, deduction amount, qualified individual, and building owner must be included to claim the benefit. 

Key Takeaways for Designers

Designers should be proactive in understanding the process and requirements for claiming the 179D deduction, so they can have educated conversations with building owners regarding their eligibility to capture this benefit. Engaging with knowledgeable consultants and tax professionals is essential in navigating the complexities of the Section 179D tax code. TaxTaker has significant experience with the 179D deduction, including in-house CPA and engineering expertise to ensure that all requirements are met to maximize this financial incentive. Significant benefits for designers focused on sustainability and implementation of energy-efficient commercial buildings. Here's a detailed exploration of how designers can qualify for this deduction, what projects are eligible, and the financial benefits involved.

‍