Section 179D – Complete Guide for Government Agencies and Non-taxable Organizations

What is Section 179D?

Section 179D is a federal tax deduction in the Energy Policy Act of 2005 aimed at incentivizing energy efficiency in commercial buildings. While government and tax-exempt entities, such as non-profits, schools, and hospitals, cannot directly benefit from a tax deduction, they can allocate it to the designers responsible for implementing energy-efficient upgrades. This allocation incentivizes sustainable building practices, the installation of energy-efficient equipment, and reduced utility bills.

Who is eligible to allocate the 179D deduction?

In the initial 179D program, only government entities were eligible to allocate Section 179D deductions. However, the Inflation Reduction Act of 2022 expanded eligibility to include tax-exempt organizations. Examples of government and tax-exempt entities that can allocate the 179D deduction include:

• Religious organizations
• Public and charter schools
• Public and private universities
• Hospitals
• State, local, or municipal governments
• Federal and military organizations
• Tribal governments

These entities can allocate the deduction to the designers responsible for energy-efficient improvements.

Who can I allocate the deduction to?

Government and tax-exempt entities cannot use a tax deduction themselves but can allocate the 179D deduction to eligible designers. As defined by the IRS tax code, an eligible designer is someone who creates the technical specifications for the installation of energy-efficient property. Eligible designers can include:

• Architects
• Engineers
• Contractors
• Energy service providers
• Environmental consultants

Allocations can be made to a single designer or shared among multiple parties, depending on their contributions to the project.

I understand architects are designers, but how can a contractor qualify?

Contractors are specifically listed in the tax code as a potential eligible designer on a project. As mentioned in the question above, if a contractor creates technical specifications for the energy-efficient equipment, they can qualify as an eligible designer to receive the 179D deduction.

Contractors may be responsible for creating technical specifications through a design-build or design-assist contract. In addition, contractors that are hired directly by the building owner to identify an issue with the current system and install a solution are likely responsible for the technical specifications of that project. Designing the sequence of operations for a building automation system is also a good example of designer activities. 

On the contrary, preparing shop drawings or proposing a change during construction that is ultimately the design team's responsibility to review and approve would not be activities that fit within the designer definition.

What qualifies as an energy-efficient upgrade?

To allocate a Section 179D deduction, the project must include the installation of qualified energy-efficient equipment in new construction or renovation projects. These include:

• Interior Lighting: LED lighting, daylighting systems, or occupancy/vacancy sensors.
• HVAC and Hot Water: Building automation systems, chillers, boilers, or air handling units.
• Building Envelope: Insulation, windows, and roofing systems.

The upgrades must achieve at least 25% energy savings compared to a reference building as determined by energy modeling.

What am I responsible for when allocating the deduction?

1. Select Who Receives the Allocation:
   • Decide which eligible designer(s) will receive the Section 179D deduction allocation.
   • You may allocate the deduction to one primary designer or split it among several parties involved in the project.
2. Review and Execute the Allocation:
   • The allocation request must be in writing and will contain project details such as:some text
     • The building address where the work was completed.
     • The completion date and final cost of the project.
     • Contact information for the authorized representatives for both the building owner and the designer(s).
   • Ensure compliance with IRS requirements for documentation.

What other responsibilities does the building owner have?

1. Site Visit: A third party professional engineer (such as TaxTaker’s engineering team, certified in 46 states) must verify the project is complete, the energy-efficient equipment is installed, and the equipment matches the technical specifications provided by the designer. The tax code requires this be completed through an on site visit to the building which consists of taking photos and notes of the equipment. For an average sized building, this visit typically takes no more than an hour.
2. Reduce the Basis of the Building:
   • After allocating the Section 179D deduction, building owners are required to reduce the basis of the energy-efficient commercial building property by the amount of the deduction allocated.
3. Maintain Records:
   • Keep detailed records of all Section 179D allocations, including allocation letters, certifications, the deductions allocated, and project documentation.
   • These records ensure the building is not over-allocated, as there is a maximum 179D amount that can be claimed.

By fulfilling these responsibilities, government and tax-exempt entities can successfully allocate the Section 179D deduction to designers, fostering sustainable building practices and strong partnerships with their design teams.

How do I keep track of allocations over time?

• Allocation Records: Maintain records of all allocations made to designers including the executed allocation letters, contact information of the designer that received the deduction, and project details such as the completion date of the project.
• Certifications: Retain energy savings certifications and other documents provided by the designer that confirm the energy modeling results.
• Maximum Deductions: A building can receive up to a maximum 179D deduction every few years. Keep track of the deduction amount and year allocated to understand what benefit may be available to allocate on future projects. 
• Future Upgrades: Document additional energy-efficient improvements and design partners for potential allocations.

What are the benefits?

While government and tax-exempt organizations cannot directly benefit from tax deductions, allocating Section 179D can provide project benefits such as:

• Incentivizing Design Teams: Encourages designers to include energy-efficient systems in the project. Building owners can ask design teams for a detailed analysis and project alternates for energy efficient components or systems.
• Pursuit of Other Incentives: Design teams can assist building owners with designing and claiming incentives that can go to the building owner such as the clean energy investment tax credit or utility rebates.
• Energy Efficient Certifications: Energy efficient systems that do well in the 179D program also support efforts toward energy efficient building certifications such as LEED or ENERGYSTAR.
• Promotes Sustainability: Drives adoption of energy-efficient upgrades, lowering energy bills and supporting sustainability goals.

Are there other incentives I should know about?

• Utility Rebates: Many utility companies offer rebates for the installation of energy-efficient improvements. Utility companies will develop custom rebate programs for building owners that implement energy efficient projects that don’t fall within their standard rebate offerings.
• PACE Loans: PACE loans offer financing with little or no upfront costs for energy efficient projects.
• Clean Energy Investment Tax Credit: For renewable energy installations such as solar and thermal storage systems, the clean energy investment tax credit is available to government and tax-exempt building owners through the elective pay program.
• Energy Grants: Non-profits and government entities may qualify for federal or state energy grants to support project costs.

Why should we have a 179D advisor?

WIth the many requirements, it’s important for government and tax-exempt building owners to also have a consultant to assist them with the 179D program. At TaxTaker, we specialize in navigating the complexities of the Inflation Reduction Act and Section 179D. Here's how we can assist your organization:

• Expertise: With a team of seasoned CPAs from Big 4 accounting firms and Professional Engineers, we bring 50 years of combined experience in tax credits and incentives. TaxTaker can assist on several incentives, making us a one-stop shop consultant for project teams and building owners.
• Compliance: We manage all aspects of a 179D study and can review all documentation to ensure compliance. We are an on-call resource for building owners across the country.
• Process Building and Implementation: Many building owners benefit from building an internal process for allocating the 179D deduction. TaxTaker can assist with education, document creation, advising, and record keeping, ensuring the 179D allocation does not become a burden for your team.
• Sustainable Partnership: By encouraging energy-efficient practices, we deliver solutions that benefit both the environment and your organization's bottom line. We have many industry partners who can assist with your future energy projects.

Our experience in processing thousands of tax incentive studies ensures that your organization is in trusted hands when it comes to participating in the 179D deduction process.