179D Energy Efficiency Tax Deduction

Brief Description

A federal tax deduction of up to $1.80 per square foot for building owners, tenants, or designers of buildings that meet or exceed a certain energy and power standard. Tenants may be eligible if they make energy efficient construction expenditures. If the system or building is installed on federal, state, or local government property, the 179D tax deduction may be taken by the person primarily responsible for the system's design, with the government owner's approval to transfer the deduction (that the public entity cannot use). The 179D tax deduction does not apply to other non-tax paying entities, including but not limited to NGOs or churches, unless there exists an energy-as-a-service agreement that is owned by a tax paying company.

Benefit

One time Federal tax deduction which decreases taxable income.

ROI

Median ranges from 5:1 to 20:1.

Utilization Schedule

Federal tax benefit realized by a reduction in federal tax payments or, in the case of Net Operating Losses, in the year(s) in which the loss created by the deduction is applied.

Fee

See ROI.

Fee Schedule

Provider dependent. Typical arrangements include (1) Full payment up front, (2) Progress payments, and (3) Full payment upon completion. Depending on the time of year, payments usually occur before benefit is realized.

Customer Commitment

Provide service provider with building drawings and specifications, costs associated with the purchase or construction of the building, allow for a site visit and access to building utility systems which typically take less than a day (requires a contact/representative on site), and contact with tax preparer.

Risks

This is a relatively low risk tax position since a certified engineer is required for sign off. Low audit rates and easy to prove if audited.

Risk Timing

This tax deduction is not currently a red flag to the IRS so audits of the 179D Deduction would most likely happen, if at all, 2-3 years from the date filed.

Process

Provide documentary information listed above, arrange and execute site visit, service provider calculates benefit (and maybe delivers a report) and will have an engineer certified in this deduction sign off, then the deduction is included in the tax return and filed. A change in accounting method form can be included in the current year tax return to claim benefits from prior tax years.

Common Industries

Manufacturing and Commercial Development. Not restricted to any specific industry, just need an energy efficient building.

Authorities For Further Research

Title 26 USC §179D for original law. Consolidated Appropriations Act 2021 makes the law permanent. There are various Internal Revenue Bulletins, Public Laws, IRS Memoranda, and IRS Notices that update and change the provisions of the original law.

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