According to the code section 179D, the designer primarily responsible for designing the energy efficient aspects of government buildings (including new construction and rehabilitation) may be able to take the federal energy efficient commercial property tax deduction for doing so instead of the owner of the property. 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 calculation below:
(The square footage for the building (new construction) or area improved (rehabilitation))
x ($0.60 per each of the three areas that you pass ($1.80 total) the energy efficiency test (HVAC/Lighting/Building Envelope))
Section 179D has been beneficial for designers of this 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 to claim the deduction:
- First, a letter from the government agency must be provided to the designer allowing them to take the deduction. This letter essentially gives the permission to pass the deduction.
- The second item is an engineers report which must be prepared to support the energy efficient improvement of the building design. Of course, this report has a cost with it and companies need to compare that cost 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.
Originally, this 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, they extended it to include units completed or renovated between December 31, 2005 and January 1, 2013 and passed more tax guidelines to support these deductions. With that being said, it may makes 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, we can quantify the deduction you would get and compare it to an estimate of how much the engineer’s report will cost in order to quantify the net savings.
To determine if your company can benefit from the Federal Energy Tax Credit, contact me or Nick Delguyd at 440-449-6800.