Understanding the energy efficient tax deduction

Section 179D has a lot to offer
designers of government structures

BY DAVID R. WALTER, CPA

Designers (architects, engineers, environmental consultants, and in some cases, contractors) of government buildings may want to take note of the recently extended Federal Energy Efficient Tax deduction (Section 179D). It now includes units completed or renovated between December 31, 2005 and January 1, 2013, and more tax guidelines were passed to support these deductions.
According to the code section 179D, a taxpayer that builds or renovates a building could be entitled to speed up the depreciation for certain items that are part of that construction. This accelerated depreciation would be allowed for the costs of certain parts of the new building (HVAC, lighting, building envelope) that meet energy efficiency standards. The deduction is limited to the lesser of the costs of the items installed or $0.60 per improvement are multiplied by the square footage constructed (see calculation below).
A piece of code section 179D also relates to the construction of government buildings and the tax deduction for the energy efficient property that is installed in those construction projects. According to the code section 179D, the designer primarily responsible for designing the energy efficient aspects of government buildings may be able to take the federal energy-efficiency tax deduction for doing so instead of the owner of the property (in this case, the government). This deduction is passed to them from the government agency for which the building was designed as the government agency does not pay tax and therefore would not get the benefit for this deduction.
The designer is defined as the person(s) that create the technical specifications for installation of the energy efficient commercial building property, and can include architects, engineers, environmental consultants, and contractors in certain cases. Under this section, the word government includes federal, state, and local government agencies, and although all government building categories have benefited from this, the most frequent projects are K-12 public schools, state universities and colleges. Other categories include post offices, military bases, libraries, courthouses, and hospitals.
The amount of the deduction passed to the designer is the lesser of the actual cost of the property or the result of this calculation: The square footage for the building (new construction) or area improved (rehabilitation) x $0.60 per each of the three areas that pass ($1.80 total) the energy efficiency test (HVAC/lighting/building envelope).

Taking off taxes
Section 179D has been beneficial for designers of this energy-efficient property who work with government agencies to build government buildings, depending on the size and level of energy efficiency, because they can take an additional tax deduction for the energy efficient improvements that were made. This deduction is a tax only deduction on the tax return of the designer.
In order to take this deduction,
the designer will need two items:
1. A letter from the government agency allowing the designer to take the deduction. This letter essentially gives the permission to pass the deduction.
2. An engineer’s report prepared to support the energy efficient improvement of the building design. Of course, this report has a cost associated, and companies need to compare the cost of the report to the amount of tax they will save through the deduction.
Again, the amount of the deduction would depend on the size of the building and cost of the improvements made (see calculation above).
Originally, Section 179D was only passed as a one- or two-year item and there was not much support for it, which is why it was not very popular and many firms were not acting on it. This past year, the deduction was extended to include units completed or renovated between December 31, 2005, and January 1, 2013, and more tax guidelines were passed to support these deductions. It may make sense to look at prior years as well to see if prior year returns can be amended to take advantage of the deduction.
With a small amount of information, an accounting firm experienced in working with real estate and construction professionals can quantify the deduction you would receive and compare it to an estimate of how much the engineer’s report would cost in order to quantify the net savings. BXM
Dave Walter is a member of Skoda Minotti’s Real Estate and Construction Group. You can reach him at 440-449-6800 or dwalter@skodaminotti.com.