IRS Section 179D Could Save You Real Money

Date Posted: July 3, 2014

Posted In: White Papers,

by Joseph C. Blanner, Esq. and  David Frederick, J.D. / LL.M.

 In the first year of law school, many prospective attorneys take a course on taxation.  One of the main principles that the professors try to convey to the students is that you, as taxpayer, want to take advantage of every lawful credit and deduction so that you pay the minimum amount of taxes you are required by law to pay. If you perform public sector construction work, there is a provision of the Internal Revenue Code (“IRC” or “Code”) that you need to know about that could potentially save you substantial sums off of your tax bill. Eligible contractors who have taken advantage of this often unknown provision of the Code have realized tax savings of hundreds of thousands or even millions of dollars.

This article describes how a building designer, which can include the contractor, can take advantage of the tax deduction available in Section 179D of the Code.  Code §179D offers a deduction to taxpayers for owning commercial building properties which meet certain energy efficiency requirements.  Since state and local governments do not need this deduction, as they do not pay federal income taxes, they may pass this deduction on to the designer of such energy efficient commercial building properties as an incentive for the designers to construct such energy efficient commercial building properties.

The process of transferring the deduction from the government entity to the designer is relatively simple and once transferred the deduction is fully available to the designer.  Section 179D of the IRC expired on December 31, 2013, meaning that any commercial building properties put into operation after that date shall not qualify for the deduction.  However, designers who previously designed commercial building properties for federal, state, or local government entities or political subdivisions (any of these individually “Government Entity”) that comply with the requirements of IRC §179D, and did not take advantage of the deduction in a previous tax year, may be able to file an amended tax return and utilize this deduction with respect to past commercial building properties. Additionally, there are efforts underway now in Congress to renew the Section 179D deductions.

Section 179D of the IRC offers a deduction for any energy efficient commercial building property placed into service during the calendar year.  The Code defines an “energy efficient commercial building property” as such building that meets the guidelines laid out in Standard 90.1 – 2001 of the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North American (“Standard 90.1 – 2001”).  IRC §179D(c)(1) and (2).  Standard 90.1 – 2001 generally identifies criteria for reducing a building’s total annual energy and power costs by fifty percent or more with respect to (1) the interior lighting systems, (2) heating, cooling, ventilation, and hot water systems, and (3) the building’s envelope.  See IRC §179D(c)(1)(C).  One may purchase a copy of Standard 90.1 – 2001 from the American Society of Heating, Refrigerating, and Air Conditioning Engineers online bookstore at: http://www.techstreet.com/ashrae/index.html .

The maximum amount of the deduction available under §179D is $1.80 per square foot of the building, if the building fully comports with all three areas of energy efficiency described in Standard 90.1 – 2001.  IRC §179D(b).  However, a partial deduction of $0.60 per square foot is available to a building that meets one or two of the three criteria in Standard 90.1 – 2001.  IRC §179D(d)(1)(A).  The rules contained in IRS Notices 2006-52; 2008-40; and 2012-22 provide the means of determining whether a commercial building property meets the energy efficiency requirements of IRC §179D and whether the deduction earned thereby will be a full or partial deduction.  It is beyond the scope of this memorandum to fully parse the energy efficiency rules found in these three IRS Notices.  However, under the terms of §179D(d)(3) and IRS Notice 2008-40, taxpayers who believe they may qualify for the §179D deduction are given guidance on what software to use and what factors the software must take into account when determining the sufficiency of the energy efficiency of new commercial building properties placed into service.  The Department of Energy maintains a list of software that will meet the requirements of §179D(d)(3) and IRS Notice 2008-40 on its website, located at: http://energy.gov/eere/buildings/qualified-software-calculating-commercial-building-tax-deductions .

The deduction available under IRC §179D typically applies to the benefit of the commercial building property’s owner.  However, Government Entities do not pay federal income tax, and the deduction under §179D has no value to them.  But Congress intended to guarantee that the incentive to build energy efficient buildings would still be applicable to Government Entities’ commercial building properties.  Therefore, Congress chose to allow a Government Entity that has constructed a commercial building property that meets the energy efficiency requirements of IRC §179D to transfer the benefit of this deduction to the designer or design firm primarily responsible for designing such energy efficient and power saving building property.  IRC §179D(d)(4).  The rationale behind this allowed transfer of the deduction was likely a recognition that building designers have a great deal of influence on the plans of Government Entities’ commercial building properties and that the incentive to create energy efficient commercial building properties properly lay with the designers.

In order for the building designer to take advantage of this transfer of the deduction from a Government Entity, the building designer and the Government Entity must comply with the requirements of IRS Notice 2008-40, which is attached hereto as Exhibit I.  Notice 2008-40 clarifies the requirements of IRC § 179D(d)(4) in several ways.  First, it defines who may be considered a “designer” of an energy efficient commercial building property, and thus may receive the transfer of the deduction from a Government Entity.  Specifically it states: 

A designer is a person that creates the technical specifications for installation of energy efficient commercial building property. . . . A designer may include, for example, an architect, engineer, contractor, environmental consultant or energy services provider who creates the technical specifications for a new building or an addition to an existing building that incorporates energy efficient commercial building property. . . . A person that merely installs, repairs, or maintains the property is not a designer.

Second, Notice 2008-40 describes how to allocate the deduction if more than one designer was responsible for designing a qualifying energy efficient commercial building property under IRC § 179D.  Third, the notice describes the form the allocation must take to be effective.  Specifically, it states:

An allocation of the § 179D deduction to the designer of a government-owned building must be in writing and will be treated as satisfying the requirements of this section with respect to energy efficient commercial building property . . . if the allocation contains all of the following:

1. The name, address, and telephone number of an authorized representative of the owner of the government-owned building; 
2. The name, address, and telephone number of an authorized representative of the designer receiving the allocation of the § 179D deduction;
3. The address of the government-owned building on or in which the property is installed;
4.  The cost of the property;
5. The date the property is placed in service;
6.  The amount of the § 179D deduction allocated to the designer;
7. The signatures of the authorized representatives of both the owner of the government-owned building and the designer or the designer’s authorized representative; and
8. A declaration, applicable to the allocation and any accompanying documents, signed by the authorized representative of the owner of the government-owned building, in the following form:
9. “Under penalties of perjury, I declare that I have examined this allocation, including accompanying documents, and to the best of my knowledge and belief, the facts presented in support of this allocation are true, correct, and complete.”

IRS Notice 2008-40 also lays out the further obligations and tax consequences for the designers taking advantage of the transferred deduction.  The designer is required to obtain the allocation transfer described above, but it is not required to remit the transfer to the IRS when claiming the deduction.  Rather, in accordance with Treasury Regulation §1.6001-1(a) the designer must simply maintain in its records sufficiently to establish the entitlement to, and amount of, any deduction it claims.  Therefore, the designer should keep the recorded transfer documents in its records and have it ready to present in case of a tax audit.  As to the designer’s tax consequences, Notice 2008-40 establishes that “the maximum amount of the §179D deduction to be allocated to the designer is the amount of the costs incurred by the owner of the government-owned building to place the energy efficient commercial building property in service.”   Also, the receipt of a §179D deduction allocation from a governmental entity does not itself count as taxable income, even though the designer is receiving consideration of value.  Moreover, the §179D deduction does not have any effect on any of the designer’s future deductions or tax treatments.

Section 179D expired on December 31, 2013.  IRC § 179D(h).  This means that any building property placed into service any time after the expiration date shall not be eligible for a building owner or designer to receive the §179D deduction.  However, the §179D deduction may still have value to designers who have built commercial building properties that comply with the requirements of Standard 90.1-2001 and §179D in the past several years.  Under IRC §6511, a taxpayer has three years to claim a refund for an overpayment of tax.  This means that if a designer built an energy efficient commercial building property that comports with the rules of Standard 90.1-2001 and 179D for a Government Entity, and such Government Entity allocated or will allocate the 179D deduction to the designer, and the designer did not claim the deduction during the tax year, then the designer may amend its tax return, claim the deduction, and be entitled to a tax refund.  However, due to the three year limitation on refunds in IRC §6511, such a refund could only apply for tax years 2011, 2012, and 2013.  A designer’s accountant should be able to assist a designer in investigating the possibility of applying the 179D deduction to past projects, amending the designer’s previous return, and claiming any refund owed.

Recommendations

Any building designer or design firm that believes it may be entitled to a deduction under §179D for past commercial building properties designed for Government Entities and a refund of past taxes paid should follow these steps:

• Determine whether the commercial building property it designed meets the requirements of §179D.  This may require:
• Examine the requirements listed in Standard 90.1-2001;
• Utilizee nergy efficiency analyzing software available at:  http://energy.gov/eere/buildings/qualified-software-calculating-commercial-building-tax-deductions ; and
• Confirm that such an energy efficient and power saving building was placed into service between January 1, 2011 and December 31, 2013.
• Contact the Government Entity for which the commercial building property was designed and ask for a representative of the Government Entity to make the required allocation of the §179D tax deduction.  Since the §179D tax deduction is an item of value, some representatives of Government Entities may want to bargain or negotiate for the allocation.
• Contact the designer’s accountant to issue an amended return claiming the §179D deduction.

 Joseph C. Blanner, Esq.  is a partner and David Frederick, J.D. / LL.M. is an associate with McCarthy, Leonard & Kaemmerer, LC. They can be reached at 825 Maryville Centre Drive, Suite 300, Town and Country, MO 63017,  314. 392.5200. emails: jblanner@mlklaw.com, dfrederick@mlklaw.com