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Tax Information Designers Should Know

A Little-known Deduction for Energy-efficient Commercial Buildings Could Eliminate Your Taxable Income

By James K. Zahn, Esq., FALA, FAIA

Recently, my accountant called to inquire if I have ever had one of my architect clients attempt to receive a § 179D Deduction for Energy Efficient Commercial Buildings granted under Title 26 of the US Federal Regulations (fondly known as the "IRS Tax Code"). I was unaware of this particular section of the code until her call; none of my clients have ever asked about it or brought it to my attention.

According to the U.S. Government Printing Office, the IRS Tax Code is 13,458 pages long and is contained in 20 volumes available for purchase at $974 plus shipping and handling. Section 179D is a very small provision buried within a voluminous document and easily can be missed. I looked up § 179D on the Internet and was astounded by what I found. This particular section of the tax code is a must read for all practicing designers and their accountants.

As you know, our legislators use the tax code to encourage certain outcomes. One of the current hot issues is energy conservation. If less energy is consumed, less pollution is created, people save money and protect the environment. Therefore, the government is encouraging public and private commercial-building owners to provide for energy efficiency in their buildings. Many private building owners and their accountants already are familiar with § 179D, which accelerates the deduction for energy improvements. Many are not aware of this benefit, but should be.

This article will concentrate on publicly owned commercial buildings because that’s where the designer is really in a position to greatly benefit from this unusual regulation. Because public-building owners do not pay income taxes, the deduction is of no benefit to them. In an unusual twist, § 179D, section 3, allows for the energy-efficiency deduction to be allocated by the tax-exempt public owner to the designer, who then can use the deduction to lower or, in some cases, entirely eliminate his/her taxable income if the building meets certain stated energy efficiencies defined in the code. Yes, you read this correctly!
 
Basically, the § 179D deduction is equal to the cost of the energy-efficient property up to a cap of $1.80 per square foot of building area. Section 3 of § 179D has been amended and reads as follows:

.01 In General. In the case of energy-efficient commercial-building property (or partially qualifying commercial-building property for which a deduction is allowed under § 179D) that is installed on or in property owned by a federal, state or local government or a political subdivision thereof, the owner of the property may allocate the § 179D deduction to the person primarily responsible for designing the property (the designer). If the allocation of a § 179D deduction to a designer satisfies the requirements of this section, the deduction will be allowed only to that designer. The deduction will be allowed to the designer for the taxable year that included the date on which the property is placed in service.

.02 Designer of Government-Owned Buildings. A designer is a person that creates the technical specifications for installation of energy-efficient commercial-building property (or partially qualifying commercial-building property for which a deduction is allowed under § 179D). A designer may include, for example, an architect, engineer, contractor, environmental consultant or energy-service provider who creates the technical specifications for a new building or an addition to an existing building that incorporates energy-efficient commercial-building property (or partially qualifying commercial-building property for which a deduction is allowed under § 179D). A person that merely installs, repairs or maintains the property is not a designer.

.03 Allocation of the Deduction. If more than one designer is responsible for creating the technical specifications for installation of energy-efficient commercial-building property (or partially qualifying commercial-building property for which a deduction is allowed under § 179D) on or in a government-owned building, the owner of the building shall

1. determine which designer is primarily responsible and allocate the full     deduction to that designer or
2. at the owner’s discretion, allocate the deduction among several designers

.04 Form of Allocation. 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 (or partially qualifying commercial-building property for which a deduction is allowed under § 179D) 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 signature of the authorized representatives of 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: "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."

.05 Obligations of Designer. Before a designer may claim the § 179D deduction with respect to property installed on or in a government-owned building, the designer must attain the written allocation described in section 3.04. A designer is not required to attach the allocation to the return on which the deduction is taken. However, § 1.6001-1(a) of the Income Tax Regulations requires that taxpayers maintain such books and records as are sufficient to establish the entitlement to, and amount of, any deduction claimed by the taxpayer. Accordingly, a designer claiming a deduction under § 179D should retain the allocation as part of the taxpayer’s records for purposes of § 1.6001-1(a) of the Income Tax Regulations.

.06 Tax Consequences to Designer of Government-Owned Buildings. 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. A partial deduction may be allocated and computed in accordance with the procedures set forth in sections 2 and 3 of Notice 2006-52. The designer does not include any amount in income on account of the § 179D deduction allocated to the designer. In addition, the designer is not required to reduce future deductions by an amount equal to the § 179D deduction allocated to the designer.

Although reducing future deductions in this manner would provide equivalent treatment for designers that are allocated a § 179D deduction and building owners that are required to reduce the basis of their energy-efficient commercial-building property by the amount of the § 179D deduction they claim, § 179D does not provide for any reduction other than reductions to the basis of the energy-efficient commercial-building property.

.07 Tax Consequences to Owner of Public Building. The owner of the public building is not required to include any amount in income on account of the § 179D deduction allocated to the designer. The owner of the public building is, however, required to reduce the basis of the energy-efficient commercial-building property (or partially qualifying commercial-building property) by the amount of the § 179D deduction allocated. ... The amount deductible under section 179D may be as much as $1.80 per square foot of building floor area for buildings that achieve a 50 percent reduction in energy and power costs.

Notice 2006-52 provides that buildings that achieve a reduction in energy and power costs of less than 50 percent may, nevertheless, qualify for a deduction of 60 cents per square foot of building floor area.

Internal Revenue Bulletin: 2008-14
April 7, 2008
Notice 2008-40
Amplification of Notice 2008-52; Deduction for Energy Efficient Commercial Buildings

Assume that the public owner allocates the energy deduction to the designer. The maximum deduction allowed under other provisions of § 179D is divided into three groupings as follows:

1. 60 cents per square foot for an energy-efficient building envelope plus
2. 60 cents per square foot for an energy-efficient interior lighting system plus
3. 60 cents per square foot for an energy-efficient heating, cooling, ventilation and hot-water system

This achieves a total maximum deduction of $1.80 per square foot of building area.

As an example, a 200,000-square-foot building times $1.80 per square foot equals a total maximum deduction of $360,000. Assume the designers’s taxable income for the year in which the building was placed into service was $250,000 before the allocated energy deduction. The calculated $360,000 energy deduction would eliminate all taxable income for that year and provide the designer with a carry-over energy deduction in the amount of $110,000 to offset the designer’s taxable income for the next tax year. The law also allows a loss carry-back for three consecutive tax years, or you can elect to carry it forward until it is used or for a maximum of 20 years.

As you can see, this is a very powerful and beneficial provision of the tax code. It is the only provision I am aware of that provides the non-building owner a financial tax benefit for the design of an energy-efficient commercial building. There are other requirements that must also be met to obtain this tremendous benefit. I believe it would be very prudent to discuss § 179D with your account or tax lawyer. Hopefully, you may find that as the designer for the project, you are entitled to receive a substantial deduction—not a tax credit—from your own taxable income. You never know, this information just might make your fiscal year a little better!

James K. Zahn is an attorney with SABO & ZAHN, Chicago. He can be reached at : jzahn@sabozahn.com or (312) 655-8620.