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Any commercial building owner looking to reduce their taxable income should heavily consider the Section 179D Tax Deduction. This deduction rewards property owners for investing in energy efficient property, such as HVAC, interior lighting, and building envelope systems. However, the process of claiming this deduction can vary depending on the role, whether as an owner or a designer. This article will cover how to claim the 179D tax deduction as a commercial building owner, including the IRS form 3115 & 7205, which must be filed. This includes a wide range of property owners, from private individuals and businesses to real estate developers and commercial landlords.
The Process for Building Owners
To claim the 179D tax deduction, building owners need to demonstrate that the energy improvements they’ve made to the building meet energy efficiency standards set forth by Section 179D and ASHRAE 90.1-2007.
First, an energy model must be created for the building in question. This involves utilizing a Department of Energy approved software to simulate how much annual energy the building consumes with the upgrades made (such as new lighting or HVAC systems) in comparison to a baseline energy model created following ASHRAE 90.1-2007 guidelines. The energy model must show that the building meets or exceeds the efficiency levels specified by Section 179D to claim a deduction.
Once the modeling is complete, the results are verified by a licensed professional engineer. The engineer will use his/her knowledge of technical concepts as well as notes from their onsite field inspection to certify that the building meets the required energy efficiency standards and is compliant with Section 179D. This step is a crucial part of the process because it provides the certification needed to support a claim.
Leyton Practice Lead, Mark Bacon discusses why it’s important to choose a consulting firm with licensed professional engineers on staff.
Once the energy model and certification are complete, the deduction may be filed but with special consideration as to whether the study was conducted for a current or previous tax year. When filing on current tax return, building owners need only file the IRS Form 7205 “Energy Efficient Commercial Buildings Deduction” alongside their tax return. When filing, building owners must file IRS Form 3115, “Application for Change in Accounting Method,” and their respective Form 7205 with their next open tax return.
IRS Form 3115 & 7205
IRS Form 3115 allows building owners to adjust their building basis, to account for the Section 179D study that is being claimed. This form follows a much more complex structure, and it is recommended that building owners advise their CPA to correctly fill out the form and avoid any delay in their claim.
IRS Form 7205 was created to officially provide a method of reporting Section 179D deduction claims. Prior to 2022, Section 179D claims were filled as “other deductions” and led to ambiguity. The form follows a straightforward structure where the building owner or designer can input basic information regarding the study of their building such as address, systems analyzed, savings achieved and even cost of energy efficient property.
How Leyton Can Help!
Leyton is here to walk you through the complexities of conducting a Section 179D study and filing a claim. If you would like more information on the Section 179D tax deduction, please contact one of our industry experts and we’ll gladly reach out to discuss further.
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