Free Tax Deduction – Anyone?

By Kyle Christensen, CPA, CCIFP, kchristensen@hhmcpas.com

Kyle is a partner at HHM CPAs, a full-service accounting and consulting firm with locations in Chattanooga and Memphis, Tennessee. He possesses over 20 years of experience working with clients in the Construction & Real Estate (CARE) industries. 

Kyle Christianson

Although COVID-19 has been making headlines in the construction industry, as well as every other industry due to the Federal Governments Paycheck Protection Program (PPP) stimulus and other initiatives, there are a few continuing tax programs that contractors should not be ignoring.

One tax benefit specifically structured for the construction industry is found in the Internal Revenue Code Section 179D.  This code section was enacted to incentivize companies to make their buildings more energy efficient.  Overall, the incentive was a method to accelerate depreciation deductions faster for any company that undertook an energy efficient retrofit or initiated new construction incorporating the energy efficient standards.  Back in the mid 2000s when this was enacted, most companies were still required to depreciate projects over a lengthy depreciation schedule (i.e. 15 or 39 years).  Thus, to be able to write off a portion of this more quickly was a novel concept.  However, the incentive really never took off because soon afterwards, the country entered the Great Recession and lawmakers quickly enacted even more generous rules to allow companies to begin writing off capital expenditures more rapidly in effort to stimulate the economy.  Thus, this deduction was somewhat shelved.  Here is the construction specific subpart that is often overlooked as well, but shouldn’t be.  

In 2008, the IRS issued notice 2008-40 which clarified IRC 179D(d)(4) that states:
In the case of energy efficient commercial building property installed on or in property owned by a federal, state, or local government or a political subdivision thereof, the Secretary shall promulgate a regulation to allow the allocation of the deduction to the person primarily responsible for designing the property in lieu of the owner of such property.

The 2008 notice provided the procedures necessary for a designer of energy efficient system to receive the benefit of the tax deduction for any government facility since the government is not able to benefit from the deduction.  The notice also provides a definition of “designer” as follows:
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 services 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.

Therefore, if a contractor, engineer, or architect is involved in this process and it meets the certification requirements for energy efficiency, the “designer” of the system can receive an “allocated” deduction  (i.e. a “FREE” tax deduction) from the government-owned facility.  There are several rules about which buildings qualify, who is deemed the designer, and the energy efficient mandates, but all members of the construction community should ensure they have not overlooked this deduction.   The deduction can be as much as $1.80 per square foot, so the benefit can be significant to the qualifying designated designer.  The Code Section 179D is set to expire at the end of December 31, 2020, but if a contractor failed to take advantage of this, there may be a way to revisit prior year projects for the last couple of years. 

​If your company is involved in government-owned projects, you should ensure that this topic is reviewed during their year-end tax planning session with their professional tax advisor.

---