September 24, 2022

Understanding the §179D Tax Deduction for Humans, Part 1

A guy who is confused about the §179D tax deduction

Who qualifies for the $1.80 $1.88 $2.00 $5.00 per sq ft tax write-off?

If you listen closely, you can hear it: The IRS Section 179D tax deduction is suddenly generating a lot of buzz.

The provision, which provides incentives in the form of tax deductions to commercial building owners and designers of government-owned buildings who meet specific energy efficiency requirements, has proven popular since going into effect in 2006. But the recent passage of the Inflation Reduction Act of 2022 (which is totally about reducing inflation and nothing else) changed the game, increasing the maximum deduction from $1.88 to $5.00 per sq ft. Now every builder, designer, architect, engineer, and contractor wants to know how to get a piece of those sweet, sweet write-offs.

In the first of this two-part series, we’ll attempt to explain §179D in plain English—who qualifies, how to qualify, and how to calculate the total deduction. Look for part two soon, which will explore the effects of the Inflation Reduction Act on §179D in greater detail—and offer expert guidance on taking advantage of the changes.

What is IRS Section 179D?

Section 179D of the Internal Revenue Code (IRC) is an engineered-based tax incentive available for the reduction of energy and power costs in commercial buildings.

The §179D tax deduction specifically applies to commercial buildings that notably reduce their interior lighting energy costs, as well as their heating, cooling, and building envelope. Currently, the maximum tax deduction is $1.88 per sq ft, and buildings can also qualify for a partial deduction for the efficiency of their individual HVAC, building envelope, and lighting systems.

“Like most sections of the IRC, §179D is complicated,” said David Diaz, partner at Walker Reid Strategies. “There’s a lot of confusion about who qualifies, and you typically need an advisor like Walker Reid to help certify everything and calculate your deduction.”

Who qualifies for tax deductions under IRS Section 179D?

Certainly not anyone at Going Concern, as our office is a Herbert Hoover-era shack powered only by burning garbage and the tears of overworked CPAs.

For real, though, the deduction broadly applies to two groups of people:

  1. Property owners who install “energy efficient commercial building property” (EECBP)
  2. Designers who install EECBP on or in a government-owned building

Practically every word in those two statements requires further explanation, and we’ll do our best to provide more clarity in layman’s terms. However, if you really want the full scoop on §179D—or find out if you or one of your clients qualifies—we suggest you contact the experts at Walker Reid.

What is an EECBP?

Among other qualifiers, the IRS defines an EECBP as property:

“…which is certified in accordance with subsection (d)(6) as being installed as part of a plan designed to reduce the total annual energy and power costs with respect to the interior lighting systems, heating, cooling, ventilation, and hot water systems of the building by 50 percent or more in comparison to a reference building which meets the minimum requirements of Standard 90.1–2001 using methods of calculation under subsection (d)(2).”

We’ll talk more about subsections (d)(6) and (d)(2) in just a bit.

The IRC goes on to explain that “Standard 90.1-2001,” i.e. the specs of the hypothetical building used for comparison against a potential EECBP, is determined by The American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) AND the Illuminating Engineering Society of North America (IES). Perhaps one day, the two will merge to form ASHRAEIES (or, likely, an even more unwieldy acronym), but until then, we suppose you’ll have to deal with both.

Standard 90.1 has been updated for projects placed in service in 2017 or later, however. And, starting in 2023, you’ll need to go by whatever standard was in place four years prior to when the building was placed in service. Simple, right?

How does a plan or building get certified as an EECBP?

Here’s where things get really fun. Subsection (d)(6) of §179D lays out the rules for certification. But the text pretty much amounts to saying, “buildings that meet the requirements for certification can be certified.”

Thankfully, our friends at Walker Reid were able to provide us with some better clarification:

EECBP certification requirements

    • The energy and power costs savings calculations must be performed with Dept. of Energy approved software
    • Field inspections must be performed after the energy efficient property has been placed into service in accordance with NREL Guidelines
    • Certifications and inspections must be completed by a qualified engineer or contractor in the jurisdiction of the qualifying building
    • The taxpayer shall maintain the certification in their records to establish the entitlement to and amount of the deduction claimed

“§179D isn’t something you can pursue on your own,” Diaz said. “You need qualified, independent people to perform inspections and get you certified.”

And, when looking for a §179D certification partner, nothing is more important than trust and engineering expertise.

“You need someone who only has your best interests in mind,” Diaz said. “We’ve helped property owners and designers achieve over $1 billion in §179D and §45L tax credits. It’s why Walker Reid exists. We’ll be honest and straightforward with you at every step, but we’ll also help you maximize your savings.”

How do you calculate the total deduction for §179D?

Again, the IRC doesn’t offer a lot of help here. Subsection (d)(2) basically says that “the method of calculation will be described by the people responsible for describing the method of calculation.”

We mentioned previously that the building has to meet or exceed a 50% savings in energy and power costs compared to a theoretical baseline building. As long as those standards are met, and they’ve been properly certified, and the calculations have been performed with software approved by the Department of Energy, the building owner should qualify for the full $1.88 per sq ft deduction. Probably.

For buildings that don’t meet the full requirements, §179D also provides deductions for partially qualifying systems:

  • $0.60/SF for HVAC systems meeting 15% savings
  • $0.60/SF for lighting systems meeting 25% savings
  • $0.60/SF for building envelope systems meeting 10% savings

The deductions are actually a bit higher now, as they’ve been adjusted for inflation. THANKS A LOT…um…whomever we’re blaming/crediting for inflation these days. Kanye, maybe?

“There are so many exceptions and qualifiers to the rules, you really need a certified partner to help you add it all up,” Diaz said. “Your standard CPA or tax accountant is almost certainly going to miss something, or worse, claim more than you should.”

How can a designer claim deductions through §179D?

Many run-on sentences and poor attempts at humor ago, we told you that two types of taxpayers could qualify for §179D. The “property owners” one seems self-explanatory, although it probably isn’t. But what the heck is a “designer who installs EECBP on or in a government-owned building?”

Apparently, a lot of people have the same question. In 2018, the IRS released a memo explaining how one qualifies as a designer under §179D. It even provides eight hypothetical scenarios, then details why the taxpayer would or wouldn’t qualify under those conditions. A helpful document from the IRS? Miracles do happen, and not just on ice.

Reading the full document (or, better yet, reaching out to our friends at Walker Reid) will explain it better than we can. But we’ll grab a few choice sections for the TL;DR crowd.

The memo defines a “designer” as:

“…a person that creates the technical specifications for installation of energy efficient commercial building property…for example, an architect, engineer, contractor, environmental consultant or energy services provider…A person that merely installs, repairs, or maintains the property is not a designer.”

And the memo ultimately draws two conclusions:

“(1) A taxpayer can qualify as a Designer of energy efficient commercial building property under § 179D(d)(4) if the taxpayer created technical specifications for construction contract documents for the design of the energy efficient commercial building property.

(2) If a building owner could have qualified for the maximum § 179D deduction of $1.80 per square foot for the installation of certain energy efficient commercial building property, then the government building owner has discretion to allocate the full $1.80 per square foot deduction to the primary Designer of one system of such property or to allocate the $1.80 per square foot deduction among several Designers.”

So, wait…who gets §179D again?

We don’t know, okay? Give us some slack, we’re breathing nothing but garbage fumes here. But, thankfully, the good people at Walker Reid know the rules of §179D inside and out.

“The answers to ‘Who gets §179D?’ and ‘How much do they get?’ are extremely nuanced, and they’re constantly in flux,” Diaz said. “That’s why our work at Walker Reid is so important. We’ll help you understand everything, stay ahead of the changes, and get the biggest deduction—all while performing the inspection and certification you need to qualify.”

Stay tuned for part two of this series, where we’ll examine the impact of the Inflation Reduction Act of 2022 on §179D in greater detail.

ABOUT WALKER STRATEGIES
With over $1 billion in total certified §179D deductions and §45L tax credits, Walker Reid Strategies has experience with proven results. We are a licensed professional engineering firm that specializes in performing §179D studies and §45L certifications. We have refined our processes to maximize financial benefits while reducing our clients’ internal costs and efforts.

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