Among the big news in tax law changes in 2021 was the Consolidated Appropriations Act of 2021. One of the provisions of this law made the energy-efficient commercial building tax deduction (IRC § 179D) permanent.

Basic Background of 179D Deduction

This deduction is a tax incentive designed to reward features that reduce energy and power costs in commercial buildings. The tax provision was initially enacted in 2005 and allows for a tax deduction of up to $1.80 per square foot for the design of energy efficient government buildings. Retro-fit modifications that increase the energy efficiency of existing buildings can qualify for a reduced deduction.

To qualify for the deduction, a building have at least a 50% savings in energy and power costs compared to theoretical baseline buildings. This standard is set by the American Society of Heating, Refrigeration, and Air Conditioning Engineers and the Illuminating Engineering Society of North America. The building must be certified by a person or organization approved by the IRS.

For a normal commercial building, this allows for immediate deduction of capital expenditures up to the maximum of $1.80 per foot instead of having to recoup the capital costs through depreciation over 39 years.

Federal, State and Local Government Allocations

One of the least known and underutilized aspects of 179D is that federal, state or local government building owners may assign the 179D deduction to the company primarily responsible for designing the property. Since governmental entities agencies don’t pay income taxes, the law allows them to assign their 179D deductions to whomever designed the energy-saving features that gave rise to the deduction. A designer is the entity that created the technical specifications for energy-efficient property and 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. A person or entity that merely installs, repairs or maintains the property is not considered to be a designer.

Examples of government-owned buildings that would typically qualify are public schools, state universities, libraries, town halls, airports, transportation facilities, post offices, courthouses, military bases, government offices and correctional facilities.

In sum, the allocation process provides a mechanism for governmental agencies to have their building outfitted with the latest energy-efficient products, encourage energy efficiency overall and confer a valuable deduction on building designers. This is a win for the government, taxpayers and the building designer.

Retroactive Allocations

If a business was eligible for a 179D deduction in previous years but didn’t take the deduction, it’s not too late. They owner may be able to amend tax returns going back three consecutive tax years and obtain refunds of tax paid for those previous years.

As with anything IRS related, the rules for complying with the law are complex and need careful study. There are many traps for the unwary.

IRS Examination Campaign

The IRS currently has an active examination “campaign” through the Large Business and International Division to address taxpayer noncompliance related to unreported income, undisclosed assets or other tax avoidance schemes. The IRS considers the 179D tax deduction an area that is fraught with the potential for abuse. As always, it is vital to assure that the deduction is proper and that proper tax advice is obtained. There are many tax consulting firms that provide their services on a contingent fee basis. The IRS has very specific rules about taxpayers’ ability to rely on firms what predicate their services or advice on contingent fees that should raise concerns. It is vital that any taxpayer seek written advice from a qualified tax professional. Taxpayers should hesitate to rely on the advice of anyone other than lawyers and certified public accountants.

Areas of particular concern in the experience with the IRS have included the following.

1. Technical Compliance with the Engineering Standards


These rules are very complex and require the assistance of an IRS-approved engineer or otherwise qualified person or organization. Furthermore, compliance with the record-keeping requirements is a must. This is not an area where one can hope that substantial compliance may be satisfactory. It will not.

2. Definition of a Designer


As mentioned above, government-owned buildings can allocate the deduction to the “designer.” A designer is defined a person that creates the technical specifications for installation of energy efficient commercial building property. A designer may include an architect, engineer, contractor, environmental consultant or energy services provider that creates the technical specifications for a new building or an addition to an existing building that incorporates energy efficient commercial building property. In contrast, a person that “merely” installs, repairs, or maintains the property is not a designer. Under this definition, identifying a designer is somewhat of a situation where “beauty is in the eye of the beholder.” Action should be taken to substantiate designer status on the front end.

3. Complicated Tax Issues 


There are also other technical tax issues that can arise regarding such concepts as “adjusted basis.” The IRS engages its national office attorneys on a regular basis during audits for 179D compliance. A full discussion of these topics is beyond the scope of this article.

Conclusion

For many years, Congress has held this deduction somewhat hostage by extending it on a year-by-year basis and not permitting construction businesses to properly plan. Now we have some certainty that this deduction will be around for years to come. The potential benefit is very substantial and can allow the economic incentives to work for businesses and governments with very tight budgets. Careful study can yield great results. Beware, however, that the compliance rules are onerous and properly accredited professionals must be employed. Due diligence on the front end will yield great results and avoid IRS entanglements on the back end.