Designers, including architects, engineers, and contractors who are involved in designing energy-efficient buildings for tax-exempt entities, may be eligible for the Section 179D Tax Deduction. This deduction serves as an incentive for those who contribute to energy efficiency by implementing energy efficient upgrades related to lighting, HVAC systems, and building envelope components. However, the process of claiming this deduction differs for designers than that of building owners, requiring specific documentation and procedural steps. This article outlines the process for designers to claim the 179D Tax Deduction, including eligibility requirements and necessary documentation.
Who Qualifies as a Designer?
Within IRS Notice 2008-40, a designer is defined as a person that creates the technical specifications for the installation of energy efficient commercial building property. A designer may include, for example, an architect, engineer, contractor, environmental consultant or energy services provider who creates the technical specifications for a new building or an addition to an existing building that incorporates energy efficient commercial building property. In short, if a professional is responsible for creating and implementing design plans for energy-efficient improvements, they may be eligible for the Section 179D Tax Deduction.
It is important to note that only projects owned by tax-exempt buildings are eligible for designers to claim. This includes buildings such as, but not limited to:
- Public Schools and Universities
- Municipal Buildings
- Libraries
- Non-Profit Buildings
- Military Facilities
- Tribal Land Buildings
Since government entities and tax-exempt organizations do not pay federal taxes, they are unable to utilize the deduction themselves. Instead, they are able to allocate the deduction to the designer responsible for energy-efficient upgrades and allow them to claim it.
The Process for Designers
To claim the 179D tax deduction, designers must first establish eligibility and then proceed through a series of key steps to ensure compliance with IRS requirements.
First, an allocation letter must be obtained from the government entity or tax-exempt organization that owns the building. The allocation letter must be signed by both parties, tax-exempt entity and designer, to be valid. The allocation letter serves as formal documentation, confirming the transfer of the deduction to the designer and outlining essential project details, including the building address, description of energy-efficient upgrades, and the allocated deduction amount.
Once the allocation letter is secured, an energy model must be created to assess the building’s energy performance. This process involves using Department of Energy-approved software to compare the building’s energy consumption before and after the implementation of energy-efficient upgrades. The energy model must demonstrate that the project meets or exceeds the efficiency thresholds established by ASHRAE 90.1 standards.
Following the completion of the energy model, a qualified third party, such as a licensed engineer, must verify and certify the results. This step includes an independent review of the energy modeling data, along with an on-site inspection to confirm that the energy-efficient measures have been installed as specified. Certification by a licensed professional engineer is required to substantiate the claim and ensure compliance with Section 179D requirements.
Once the allocation letter and certification are obtained, the deduction may be filed on the designer’s tax return that corresponds with the year the energy efficient commercial building property was installed. It is important to note that the statute of limitations plays a role in the availability of a claim, meaning a Section 179D tax deduction must be filed, or amended, for an open tax year. When filing on current tax return, designers need only file the IRS Form 7205 “Energy Efficient Commercial Buildings Deduction” alongside their tax return. When filing on a previous tax return, designers must file IRS Form 7205 alongside their amended tax return.
How Leyton Can Help!
Navigating the process of claiming the Section 179D tax deduction as a designer requires careful adherence to IRS guidelines, including securing an allocation letter, conducting energy modeling, obtaining certification, and correctly filing the deduction. Ensuring compliance with these steps allows designers to maximize their tax benefits while contributing to energy efficiency in government and tax-exempt buildings. For further guidance on the 179D tax deduction process, speak to one of our industry experts.
