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The Nine-Point Plan for Handling §179D: Part 1

Written on May 12, 2022

By Karen J. Koch and Imran Syed  

Section §179D can help your commercial real estate clients reduce taxable income and increase cash flow significantly.  

Just make sure you know the current rules, rates, regs, and the reach of this provision. Whether you have a large roster of commercial real estate clients or are just dipping your toes in the water, it’s easy to get overwhelmed by all the existing and potential changes to energy incentives. That’s why it’s so important for the energy design needed to qualify for tax incentives to be correct. The design for claiming lucrative tax incentives is as critical as building the financial stack. Map out a list of points to discuss with your commercial real estate clients.  

Key Discussion Points to Get the Ball Rolling:  

  1. Build a business case that supports the investment.  

  1. Start planning at the beginning of the project – when you first conceptualize it – to maximize the benefits.  

  1. Be aware of different enactment periods and different criteria to qualify.  

  1. Be mindful of each client’s tax structure and their ability to absorb deductions.  

  1. Explain the convergence of opportunities and the integration of approaches.  

  1. Simplify confusion with a turnkey solution.  

  1. Take advantage of respective industry experts, products, and performance.  

  1. Stress the strength of audit defense and warranty.  

  1. Emphasize that you have a team that advocates for the owner – customized to your client’s needs.  

We recommend taking a team approach to helping your commercial real estate clients maximize savings and increase cash flow as they move toward energy-efficient buildings. It can be too much for any single professional to handle. Make sure your team includes an independent party that can assist with the design review and certify the property’s performance for energy efficiency.  

The key is to position yourself as the quarterback of the expert team to deliver a solution that maximizes the client’s cash flow. Let’s look at what can apply under the current enacted legislation. At its core, the §179D tax deduction encourages building owners and design firms to reduce their carbon footprint by implementing energy-efficient systems. As energy costs rise, reducing those costs is a priority for most public and private organizations.  
Commercial Building Owners: If your clients build, own or lease commercial buildings, , they may be eligible to deduct all or part of the costs associated with the construction, installation or retrofit to make their properties more energy efficient.  

Design Firms – Government Buildings: In the case of energy-efficient commercial building properties  installed on (or in) property owned by a federal, state or local government – or a political subdivision thereof – the government-owning entity of the property may allocate the §179D deduction to the primary designer of the building.

Identifying Your Building 

EPAct §179D Eligibility  
 
Buildings that qualify fully include those that reduce their total energy and power costs by 50 percent or more when compared to a reference building. If you can prove that is the case, your client will earn a generous tax deduction amounting to $1.80 per square foot.  

Buildings that qualify for a partial §179D credit include those with individual systems that are eligible for partial deductions. Clients who qualify will earn a tax deduction amounting to $0.60 per square foot for each system. The partial qualifying systems include lighting, HVAC and building envelope.

Interim Lighting  

Our clients often ask us if they can qualify for §179D credits if the scope of work includes a lighting retrofit, or if they are unable to qualify for a partial deduction through energy modeling. The answer is yes: Interim lighting can often serve as an alternative. Here’s how:  

Based on the lighting power density (LPD) calculation (watts per square foot) as compared to an ASHRAE reference building, there is a 25 to 40 percent LPD reduction (equal to a $0.30 to 0.60 tax deduction). However, you must incorporate bi-level switching or automatic controls.

Hear more from Karen Koch at our upcoming Real Estate and Construction Half Day Conference on June 23. Register now. 

Check back next week for Part 2, covering putting the EPAct §179D deduction into practice.