Thinking green at tax time could save business owners, especially architects and engineers who do work for federal, state or local governments, plenty of cash by taking advantage of a generous energy-saving tax deduction for commercial and government buildings – Section 179D of the tax code. For example, work an architectural firm did for energy efficient middle schools and high schools led to a tax deduction of $507,000 for that firm. If your architect or engineering firm would like that kind of tax savings – read on.
Unfortunately, many Massachusetts firms may be missing out on these savings, offered through the federal 179D energy tax deduction, simply because the concept of an “energy-efficient commercial building,” is too little known or misunderstood. The two biggest misconceptions are: 1) how “green” the building has to be to qualify; and, 2) what businesses can benefit.
When it comes to the idea of “green,” too many people think it needs to involve grass on roofs or windmills outside, but nothing could be further from the truth. The tax deduction(up to $1.80 per square foot) is available for improvements to hot water systems, heating and air conditioning systems, interior lighting and building envelopes – and you can partially qualify. Quite frankly, the current state building code of Massachusetts is in most cases markedly higher than the requirements of 179D – which are based on energy efficiency that improves upon 2001 standards.
Second, the key is to understand that architects and engineering firms who design or oversee new construction or improvements for federal, state, and local governments can also take advantage of this powerful tax incentive. Architects and engineers can look at taking advantage of this tax benefit for buildings (and improvements) which they designed that have been placed in service in the last three years. It is important to think broadly in terms of government buildings – ex. a State university; an airport; an office building; a military base – all of these are potentially eligible for the tax benefits of 179D.
Why this law and the benefits for architects and engineers? Commercial buildings account for about 80 percent of the electricity, and more than 40 percent of all energy, consumed in the United States. Since a significant amount of that energy is wasted, the tax incentive was written into the law to encourage not only commercial building owners, but also federal, state and local government agencies to go green and reduce energy consumption when building new or renovating existing structures.
Obviously, federal agencies, state governments, county boards, and city and town councils cannot take a 179D deduction because they pay no income taxes. Anticipating that, Congress wrote the law to allow federal, state and local government officials to assign the deduction to the architects and engineering firms with whom they partner.
The problem is very few architects and engineers – not to mention government agencies – are aware of this little-known provision in the law, and if they are aware they don’t think it can benefit them or it’s too good to be true.
The former IRS Commissioner Mark Everson said it best: “Companies are leaving tax benefits on the table, and I want to stress that these are benefits that Congress very much intended you to benefit from.”
The Deduction
Claiming a 179D deduction isn’t hard, but it does require a little know-how and some giddy-up. There are three steps:
First is identifying government buildings in which your architect or engineering firm did the design work. Ventures that are eligible – include, as mentioned, government buildings that have new construction or improvements made in the last three years– and projects put in place by the end of this year can also qualify.
As discussed, any number of buildings can be eligible, including all commercial buildings, warehouses, factories, parking garages, and multi-family housing of at least four-stories. Don’t overlook anything when thinking green about this tax incentive. Construction or heating and cooling projects for the local schools could qualify, as well as projects involving dormitories, libraries, airport terminals and jails.
Second, is to secure a letter from the responsible government employee that assigns the 179D to the architect or engineering firm. Getting this letter sounds easy – it is often not. Two issues – the government might have given the letter to another engineer or architectural firm that was also involved in the project – think “snooze/lose.” Bottom line – move now.
In addition, navigating the bureaucracy to find the right person who can sign the letter (and having them sign the letter) can be far from a walk in the park. A recent American Institute of Architects webinar regarding 179D on which I spoke, we were flooded with questions about problems in getting these letters. At our offices, we have a core of folks who do nothing but focus on getting these letters.
Finally, after identifying the building and getting the letter from the responsible government official, you need to have an independent (separate from the architect or engineering firm who did the work) review by an engineer to determine the energy efficiency of the commercial/government building – i.e., how big is the energy savings and tax deduction? We’ve seen in practice working with thousands of architect and engineering firms that successfully performing this step of independent verification requires a vital combination of knowing the engineering issues but also being aware of the relevant tax law of 179D – the IRS isn’t giving this big tax break away. We find that it’s most helpful that we have a team of CPAs, tax lawyers, architects and engineers assigned to each 179D project to ensure that the architect or engineering firm receives the full tax benefits to which they are entitled.
With tax filing season upon us, it’s crucial for architects and engineering firms in Massachusetts to consider this significant tax benefit. Why leave any hard-earned money on the table when it can be put to good use –helping grow your firm, create more jobs and improve the environment – a win for everyone.
Dean Zerbe is alliantgroup’s national managing director based in Washington D.C.
