When clients call me looking to create tax deductions before year end, I generally deliver the bad news that if they want to bring their taxable income down they are going to have to spend some of their money or at least put it in a restricted account. This, however, is not necessarily the case with clients working in the construction industry. Clients in this industry do have an opportunity to create tax deductions for jobs that they have already completed that vastly exceeds any additional cash they will need to spend to create those deductions.
This elusive opportunity, to magnify the deductibility of cash outlays, is called the “179D Deduction”. The 179D deduction is available to the owner of a building that meets certain energy efficiency guidelines. More importantly for those of you who own or manage a construction, engineering or architecture firm; the government has the ability to allocate a 179D deduction to a contractor, engineer or architect who designed a newly constructed building or upgraded building system.
If you have never heard of this deduction then it is time to take out your job schedules for the past 4 years and determine what jobs you performed for government entities that may have been reasonably energy efficient. (The required guidelines are not all that aggressive!) Once these jobs have been identified, you or a consultant should contact the government agency to determine if a “179D allocation letter” had been issued to anyone in connection with the building or project. If one has not been issued then steps should be taken to have an engineering study performed by a specialized consulting firm to determine if the building or building system qualifies for the 179D deduction.
The numbers related to these deductions can be huge! (Perhaps now is a good time to skip to the examples below and consider if you had several of these types of jobs in any one tax year.) The deduction is based on $1.80 per square foot of the building if the entire building meets certain energy efficiency guidelines. If only one of 3 building systems (Lighting, HVAC or Envelope) meets certain guidelines then a $0.60 per square foot deduction is allowed. An upgraded HVAC system can be such an energy relief that an upgrade to the HVAC system is capable of bringing the entire building to a level of efficiency that it will qualify for the entire $1.80 per square foot deduction.
It is time to move quickly if you believe you may have completed some of these types of jobs in 2013 but never investigated the possibility of taking a 179D deduction. If you receive an allocation letter and have an engineering study completed to certify that the building meets the guidelines an amended return can be filed to claim the deduction for up to 3 years after the prior year return was originally filed. This means that if you filed a 2013 tax return on March 14, 2014, then you have until March 13, 2017, to amend that return. Obviously much has to happen before the amended return can be filed to claim this deduction so time is short for finding any 2013 deductions; luckily there are still the 2014 – 2016 tax years that may have some of these hidden deductions that can be pursued at a more reasonable pace.
If you are still with me… one last detail to pay attention to; the allocation letter requires a specific language. Do not rely on a letter that has not been reviewed by a specialized consultant!
Now for some examples that show the significant opportunity there is to save real money with the 179D deduction:
Example 1
A general contractor is responsible for designing and constructing a new school which is 200,000 square feet. If the new system brings the efficiency of the overall building to a specified guideline then the general contractor may be allocated a deduction of $1.80 per square foot of the building or $360,000. This deduction would translate into Federal tax savings of $142,560 if the taxpayer was in the highest marginal tax bracket of 39.6%
Example 2
An electrical contractor is responsible for designing and upgrading the lighting system in a school which is 200,000 square feet. If the new system brings the efficiency of the lighting system to a specified guideline then the electrical contractor may be allocated a deduction of $0.60 per square foot of the building or $120,000. This deduction would translate into Federal tax savings of $47,520 if the taxpayer was in the highest marginal tax bracket of 39.6%
Example 3a
An HVAC contractor is responsible for designing and upgrading the HVAC system in a school which is 200,000 square feet. If the new system brings the efficiency of the HVAC system to a specified guideline then the HVAC contractor may be allocated a deduction of $0.60 per square foot of the building or $120,000. This deduction would translate into Federal tax savings of $47,520 if the taxpayer was in the highest marginal tax bracket of 39.6%.
Example 3b
The same HVAC contractor was able to bring the entire building to a specified guideline solely through upgrading the HVAC system. The HVAC contractor would be allocated a deduction of $1.80 per square foot of the building or $360,000. This deduction would translate into Federal tax savings of $142,560 if the taxpayer was in the highest marginal tax bracket of 39.6%
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