OCTOBER 20, 2011 REPRINTED FROM: FORBES.COM
Let's take a pause from the constant back-and-forth of what will or won't happen in Washington regarding taxes and President Obama's proposal for a jobs bill. Instead, for a change, let's talk about a little-known big tax break that is available now and that can put cash now into the pocket of your business - especially if you are an architect or engineer. Surprisingly, this break can also can benefit local, state, and federal agencies.
What is this wonder tax break? 179D. This is the section of the tax code that provides a benefit for businesses, architects, engineers and governments when they build or renovate a building (or design a government building in the case of an architect or engineering firm ) that is energy efficient. The maximum deduction is $1.80 per square ft.
For this tax incentive there are three different groups that can benefit – business owners; architects and engineers; local state and federal government agencies. And in this Reader's Digest discussion (more details here especially on how your building is certified as energy efficient) there are three things you need to know about the law.
THREE THINGS TO KNOW ABOUT THE LAW
The first thing you need to know is that for an energy efficient building to qualify, or partially qualify, it does not have to have grass growing on the roof or a windmill powering its electrical systems. The reality is that in working with hundreds of clients, alliantgroup (my firm) has found that the vast majority of new construction (and many energy efficient redos) will qualify or partially qualify for 179D just by meeting today's stricter building code requirements.
Second, there are a number of ways that a building or improvement can qualify or partially qualify. The three subsystems that are potentially eligible for this lucrative incentive are the building envelope; HVAC/hot water systems; and interior lighting systems. It is common that a building or improvement can qualify for one subsystem and not qualify for the other two.
Finally, the definition of a building is very broad. It would include basically all commercial buildings, warehouses, factories, parking garages, and family housing that is four stories or greater. For local, state, and federal government it would include new schools, dormitories, airport terminals, jails – you name it. The one rule of thumb I have learned from my colleague David Ji who lives and breathes all this is that for the economics of 179D to make sense the building (or collection of buildings for example in an office park) should be greater than 50,000 square ft.
WHO CAN QUALIFY – THREE GROUPS
OWNER. The first group that can qualify is the owner of the building or improvement – – and this also includes a tenant if the tenant paid for and owns the improvement. The building owner can go back to buildings put in service or improvements made in the last six years – – and they will qualify for 179D. The building owner takes the deduction in the current year and reduces his basis in the building or improvement. For building owners, 179D provides a potentially significant timing benefit in paying taxes.
GOVERNMENT. In drafting this legislation, the Senate intended to encourage government agencies to also build energy efficient buildings. In that light, the law allows a state, local or federal government (think also schools and public universities) entity to transfer the tax benefit to the architect or engineer who designed the building for consideration. The government can go back to buildings and improvements placed in service in the last three years. This provision is not available for nonprofit entities such as charities.
ARCHITECTS/ENGINEERS. It naturally follows from the above paragraph that the final group benefiting from 179D are those architect and engineering firms that engage in design work on behalf of state, local and federal government. The architect or engineering firm is assigned the tax benefit from the government agency. In practice, the government may be able to assign the tax benefit to a number of different architect or engineering firms. Therefore, it is crucial that the architect or engineering firm without delay request an official letter from the responsible government employee assigning the tax benefit to their firm (recall – good for buildings in service last three years) – – or even better incorporate the tax benefit in the contract negotiations.
At the end of the day, this tax break has provided millions of dollars in tax benefits for business owners and architect and engineering firms as well as providing real assistance to local, state, and federal government, while helping lower energy costs, improve energy efficiency and the environment . One tax break that does all these things. It is the tax code answer to baking soda. Unfortunately, it is a tax break that many are overlooking.
Dean Zerbe is alliantgroup's National Managing Director. Dean was formerly Tax Counsel and Sr. Counsel on the Senate Finance Committee and was a key player in all the major tax legislation passed during his tenure. Dean speaks throughout the country and meets with accounting firms and their clients to discuss the outlook for short-term and long-term changes in tax policy as well as ways accounting firms can help their clients lower their tax bill.
Visit Dean's Forbes Blog at http://blogs.forbes.com/deanzerbe and share your comment.