Is Your Construction Firm Eligible for an Energy-Efficient Tax Break?

Under Section 179D of the Internal Revenue Code, a tax deduction is available for expenses related to energy-efficient modifications to both new and existing commercial buildings, as well as certain types of residential rental properties. Initially introduced as a temporary measure and extended multiple times, this incentive was made permanent with the passage of legislation in late 2020. Importantly, the legislation allows the maximum deduction to adjust with inflation, enhancing its potential benefits.

This particular deduction, referred to as Sec. 179D, primarily benefits property owners who implement these energy-saving upgrades. However, specific contractors working on government-funded projects may also qualify to claim this deduction.

Criteria for Eligibility

Federal, state, or local government entities that perform energy-efficient refurbishments on their buildings can transfer the deduction to the taxpayer who played a pivotal role in designing these enhancements.

According to IRS guidelines, a "designer" is defined as an individual involved in creating the technical specifications for energy-efficient installations within commercial buildings. This role differs from those focused solely on installation, repair, or maintenance. It typically includes professionals such as architects, engineers, or specialists in the environmental or energy sectors.

"Construction contractors" who significantly contribute to the design phase of energy-efficient projects, especially those in design-build arrangements with governmental agencies, are also candidates for this deduction.

Defining Qualifying Improvements

Eligibility for the Sec. 179D deduction includes entirely new constructions and modifications or expansions to existing commercial structures. Residential rental buildings with four or more stories also generally qualify. Eligible parties can immediately deduct the full cost of approved energy-efficient improvements up to the specified limit (for precise figures, consulting with a professional is recommended).

An improvement qualifies if it pertains to the property’s interior lighting, HVAC, hot water systems, or the building envelope and is depreciable. The improvements must be designed to reduce annual energy and power expenditures by at least 50% relative to the industry standards, as certified by an independent contractor or licensed engineer. Partial deductions are also available for components that meet certain reduced energy savings thresholds.

Previous Tax Years and Catch-Up Claims

If your construction firm has completed projects that qualified under Sec. 179D but did not claim the deduction at the time, you can file an amended return to recoup those benefits. Generally, the filing deadline for an amended return is three years from when the original return was filed. Alternatively, building owners may file IRS Form 3115, "Application for Change in Accounting Method," to claim deductions retroactively in the current tax year. This option is not available to designers.

Exploring the Deduction

Don't overlook potential tax benefits. If your construction firm is involved in energy-efficient projects, you could be eligible for the Sec. 179D deduction, which not only reduces tax liabilities but also promotes environmental sustainability. To maximize your savings and determine your eligibility, reach out to a Whittlesey advisor today.