The long-awaited extension of the 179D tax credits and 45L tax credits that could save architects thousands of dollars has been signed by former President Trump on December 20, 2019. It has been known as the Consolidated Appropriations Act of 2019 and is notably for architecture, engineering, and construction industries. The portion on 179D tax credits is for energy-efficient commercial buildings while the 45L tax credits are for homes and multifamily properties that are energy-efficient. Both the 179D and 45L tax credit is touched on and extended in the Consolidated Appropriations Act of 2019. And both the 179D and 45L tax credits have previously expired on December 31, 2017.
Additionally, this extension has made both 45L and 179D tax credits incentives retroactive and applicable to projects completed between 2018 and 2020. The extension of the 179D tax credits incentives encourages the design and installation of building systems that are energy-efficient and general energy conservation in commercial properties.
What the 179D Tax Credits Incentive Is
In 2005, the Energy Policy Act was originally passed and has been renewed several times since with various changes to the level of efficiency entailed to be eligible for the incentive.
The 179D tax credits incentivize building architects and owners for installing building systems that are energy-efficient including indoor and outdoor lighting, HVAC, and building components. The 179D tax credits apply to both new construction and retroactive projects. The 179D tax credits claim for the deduction can be made by any commercial building or multifamily properties that are 4 stories or higher.
The 179D tax credits or benefits are a federal tax deduction of $0.30 per square foot up to $1.80 based on certain building requirements.
How the 179D Tax Credits are Allocated to Designers and Architects
The 179D tax credits may be claimed by any private property owner whose building reflects the specific energy-efficiency requirements. However, the most valuable benefit of the 179D tax credits incentive for designers or architects is the provision in the law to allocate the deduction to the one who designed the technical specifications for a public entity. As public entities are non-taxable, deductions are unutilized thus the tax code allows the 179D tax credits incentive to be honored to the designer or architect. It serves as an incentive for focusing on energy conservation and efficiency in public spaces.
Public spaces that can qualify for the 179D tax credits incentives for architects or designers include city, state, and county, as well as federal buildings like public universities, police and fire stations, military bases, K-12 schools, and federal government office buildings itself.
It has been previously required from small businesses to pay for signing the 179D tax credits allocation agreement but has since been backtracked. Architects and designers should not be required to pay fees by their state and federal government entities. They do not also have to pay a fee to receive an allocation letter as announced by the Department of Treasury.
In more recent years, a lot of cities and state agencies have implemented procedures for identifying who can receive the 179D tax credits allocation and how to issue them as well. The tax code dictates as well that the allocation of the 179D tax credits is to the person primarily responsible for the property’s design instead of the property owners of such structures or buildings.
Some state departments have also created processes for handling 179D tax credits requests. To cite an example, the state of Utah requires a signed affidavit from the architects and engineers of an eligible project before signing the allocation letter. The affidavit should have stated whether they will participate in the 179D tax credits allocation or choose to opt out. This procedural example and several others like it ensure transparency and an equal opportunity to parties involved often sharing percentages of the 179D tax credits allocation and certification fees.
How the 179D Tax Credits Allocation is Claimed
The architects and engineers of an eligible public project completed between the 1st of January 2016 and the 31st of December 2020 can claim the 179D tax credits deduction on their applicable tax return. Applicants must include the allocation letter duly-signed and the letter of certification from a 3rd-party engineer. This third-party engineer should have been the one who performed the necessary energy modeling and ocular site inspection on each building.
There are existing licensed engineering firms that specialize in this category of energy modeling with the IRS tax requirements. They may offer complimentary 179D tax credits benefits analysis and quotes for the certification.
179D Tax Credits Questions that are Frequently Asked
Here are some frequently asked questions to help one better understand the 179D tax credits section about energy-efficiency tax deductions. Knowing more about this may benefit a lot of businesses.
- What qualifies for 179D tax credits deductions?
Building improvements that are energy-efficiency geared to reducing the total annual power costs by 50% can qualify for the 179D tax credits. The improvements may be on the interior lighting, lighting systems, heating, cooling, and ventilation systems and may even include hot water systems.
The partial deduction may be allowed but to justify the 179D tax credits claim, energy simulation is a prerequisite. Ocular inspection and testing should be performed by a qualified engineer or a registered contraction in the jurisdiction.
- How much is the 179D tax credits allocation?
The maximum deduction for a 179D tax credits claim is $1.80 per square foot for a 50% reduction in total annual power costs. For maximum deduction 179D tax credits claims, the allocation should not exceed the amount of the cost of energy-efficient commercial building properties placed in service on that taxable year.
Partial deduction for 179D tax credits claim is at ¢60 per square foot owing to a 25 to 40% reduction in the power density of lighting systems. For warehouses, partial deduction qualifications for 179D tax credits of energy reductions should be at 50%.
- What requirements are needed to take the 179D tax credits allocation?
Certification of energy efficiency is necessary and should be completed by independent third-party engineers. The certification should also show both software modeling (to quantify the 179D tax credits deduction) and an ocular site visit (to assess if the components have been installed as designed).
- What properties qualify for 179D tax credits allocations?
- Commercial buildings of any size
- Apartments for lease, comprising of 4 or more stories
- Energy renovations of commercial structures
- Who is qualified to claim the 179D tax credits allocation?
- Property owner/s at the time of energy-efficiency improvements
- Designers of public structures like architects, engineers, contractors, environmental consultants, and even energy distribution entities.
- How long is the 179D tax credits eligibility timeframe?
Buildings or properties must have been completed or renovated after the 31st of December 2005 with no specific end date thereafter.
- How will the 179D tax credits allocation affect tax returns?
The 179D tax credits deduction will reduce tax income directly during the year the building has been placed in service. It will reduce as well the depreciation expenses of the said asset. Usually, the qualified claimants can take the deduction for earlier years without modifying their tax returns.
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