179D and Other Expired Tax Deductions Are Extended

On Friday, Dec. 19, 2014, President Obama signed into law the Tax Increase Prevention Act of 2014 (HR 5771). This officially extends the section 179D Tax Deduction along with over 50 other expired incentives for individuals and businesses retroactively through the end of 2014.

The Tax Increase and Prevention Act is simply a one-year extension to section 179D Tax Deduction and does not make any technical changes to the 179D Tax Deduction. The following is a clarification of the use of the 179D Tax Deduction and the applicability moving forward.

    In the private sector the 179D Tax Deduction will now be available for projects placed in service from Jan. 1, 2006 to Dec. 31, 2014.

    For public sector designers and contractors looking to have government/public buildings allocate the deduction to their companies, the 179D Tax Deduction will be available for open amendable tax years which for most companies will include projects placed in service from 2011 through Dec. 31, 2014.

    Baseline requirements for the qualification of 179D Tax Deduction will remain 2001 ASHRAE 90.1.

    The qualifying criteria and benefit will remain the same for the 179D Tax Deduction: Buildings will be able to qualify for a maximum of $1.80 per square foot if they achieve a 50 percent reduction in energy cost savings. Partial deductions are still available for lighting, HVAC and building envelope at $0.60 per square foot per category of qualification. The qualifying energy cost savings percentages remain at 25 percent for lighting, 15 percent for HVAC and 10 percent for building envelope.

    179D Tax Deductions under the interim lighting rule are still available for a maximum benefit of $0.60 per square foot and could range between $0.30-$0.60 per square foot for lighting power densities reduction between 25 to 40 percent respectively. Bi-Level switching will still be required when certifying lighting projects under the interim lighting rule.

    No changes were made to the type of building owners who can allocate the 179D Tax Deduction to designers and contractors. The 179D will still be able to be allocated by government owned buildings only. Private owners, non-profits, tribes, etc., will not be able to allocate the 179D Tax Deduction.

    An allocation letter is still required for government/ public agencies to allocate the 179D Tax Deduction to designers and contractors. No changes have been made to the structure or requirement of the 179D Tax Deduction allocation letter.

If you have any projects or a commercial building that you would like reviewed for feasibility of 179D Tax Deduction qualification, visit Walker Reid Strategies.

Do Your Past Commercial Projects Qualify for an Unused Tax Deduction?

IRS Section 179D has permitted qualifying buildings to receive tax deductions for energy efficiency since 2006. In general, roofing professionals have been unaware of this tax break and, as a result, have not taken advantage of it. Here’s a look at the 179D tax deduction, some reasons why it has been overlooked, and, most importantly, whether there is still time for you or your clients to retroactively claim Section 179D.

WHAT IS 179D?

Enacted under the Energy Policy Act of 2005, Congress added Section 179D as an “energy efficient commercial building deduction”. It was intended to serve as an incentive for the public and private sector to build energy-efficient buildings. Overall, the provision allows for a tax deduction of up to $1.80 per square foot for buildings that meet certain energy-usage reduction criteria. More importantly, the section allows for a “partial deduction” of $0.60 per square foot for three individual categories: interior lighting; HVAC and hot-water systems; and building envelope, including the roof.

A variety of different factors go into determining whether the roof system will meet the energy-savings criteria. In the northern climate zones, roofing systems with increased insulation values, as well as vegetative roofing systems, are going to have potential to exceed the energy-saving criteria of 179D. In southern climate zones (which typically include Florida, Texas and southern portions of Alabama, Arizona, Arkansas, California, Georgia, Louisiana, Mississippi, Oklahoma and New Mexico), cool roofs and insulated systems typically are good candidates to qualify for the energy-saving targets established in 179D. So why have relatively few roofing contractors made use of the provision? At least part of the answer has to do with how the provision was introduced and the lack of expertise available at the time to provide the necessary third-party verification.

For a building envelope to qualify for the deduction, the IRS requires a software simulation to model the annual energy cost savings for the building compared to a theoretical reference building. This study has to be completed and inspected by an independent engineer. However, when the tax provision was initially enacted in 2006, there wasn’t a single firm in the nation that was structured to offer this IRS-required service.

To make the tax incentive more accessible, the IRS developed a simplified “energy analysis,” referred to as the “Interim Rule” for partially qualifying lighting improvements. This adjustment proved effective for the lighting industry whose contractors and engineers quickly developed the necessary verification services to demonstrate compliance with the provision’s requirements.

While lighting contractors benefitted from the new tax code, contractors who worked on the building envelope were left outside. When Section 179D was introduced, the building envelope had to produce a nearly 17 percent reduction of combined energy use from the building’s HVAC and lighting systems. This proved to be a difficult target and, in 2008, the IRS issued a notice that reduced the requirements to 10 percent with the hope of stimulating use of the 179D incentive in the building envelope industries.

WHAT DOES THIS MEAN?

Once the lower 10 percent threshold was permitted by the IRS, engineers and tax specialists recognized the benefits that had been available to other industries were now accessible to roofing contractors. While a few roofing companies have benefitted from millions of dollars in tax savings through Section 179D, many millions of dollars remain unclaimed by roofing companies that have installed new roof systems.

Private and government buildings that meet the criteria are eligible for the tax incentive. To date, most of the tax deductions have originated from government-owned buildings. Congress recognized that government entities cannot themselves benefit from tax deductions, so they allowed the deductions to be allocated to the designer or contractor of the energy-efficient system.

RETROACTIVE OPPORTUNITY

The provisions for Section 179D were in effect from 2006 through the end of 2013. Congress approved extensions in 2006 and then again in 2008 and there is bipartisan support to continue the extension through 2015 at least, although legislation to do so is still pending. (See “The Future of Section 17D”, below.) This means current and future qualifying projects seem likely to be eligible to claim this tax break.

Here’s the important part: For work completed before 2014, there is still an opportunity to claim the tax break but time is running out.

For public projects, a study can be performed for pre-2014 projects to see if you can receive the government-allocated deduction. However, the IRS only allows you to amend open tax years, generally three years from the filing date, so it is better not to wait.

For private projects, the building owner can claim deductions in the current tax year, meaning no amendment is necessary for eligible buildings all the way back to 2006. While you may not directly benefit from this tax deduction, it can be useful information for your commercial clients and may help with bidding future projects, assuming the tax deduction is extended.

The Section 179D tax deduction has been historically underused by roofing contractors. To change this, the IRS has modified the requirements to make it more viable. Also, the industry now has the third-party engineering firms required to verify eligibility. Bottom line: There are still opportunities for contractors who have performed energy-saving roof installations to realize significant tax savings.

THE FUTURE OF SECTION 179D

Section 179D is included in the Senate Finance Committee’s EXPIRE Bill. It includes a two-year extension, as well as expands the deduction to the designers of nonprofits. The House Ways and Means Committee held a series of hearings about tax extenders this year. Chairman Camp of Ways and Means had indicated it was unlikely he would extend as many provisions as the Senate EXPIRE Bill. To help support Section 179D, review a Suggested Letter written by Energy Tax Savers Inc., a provider of Energy Policy Act tax services. You can personalize and send the letter to your representatives and members of the Senate Finance and House Ways and Means committees, as well as tweet your support with suggested Twitter handles and hashtags.