September/October 2017
By Valerie Ward, alliantgroup National Director

According to a recent survey by the Air Conditioning Contractors of America (ACCA), contractors are feeling positive about short-term growth in 2017. The renewed call to improve our country’s crumbling infrastructure will benefit the entire HVAC and electric industry. Building owners will make long-term investments in energy-efficient systems that save thousands of dollars in energy costs down the line. The retrofitting of buildings is a fast growing service, and as construction costs rise, retrofits or renovations are becoming more popular than new construction. The renewed interest in improving our nation’s infrastructure boosts the HVAC industry as a whole. Contractors are uniquely positioned to benefit from this shift and can maximize this boost by claiming a powerful government tax incentive.

An Incentive for Contractors

Twelve years ago, Congress enacted the Energy Policy Act of 2005 to tackle growing energy consumption in the United States. Since commercial buildings account for approximately 70% of total energy usage, Congress created an incentive, the Energy-Efficient Commercial Building Deduction, to reward building owners for energy-efficient renovations and retrofits (as well as completely new energy-efficient constructions). This deduction was intended to bring down commercial energy usage by incentivizing energy-saving improvements.

The government is the single largest property owner in the United States, but initially, this incentive excluded government-owned buildings because the government is a non-tax paying entity. However, to further promote energy independence, in 2008 the IRS expanded the deduction to allow AEC firms to claim 179D through their work on government-owned buildings.

As you can imagine, this expansion brought a huge opportunity to the AEC industry.

Section 179D: How it Works and Qualifying Buildings

The Energy-Efficient Commercial Building Deduction (better known as section 179D of the tax code), is a tax incentive available to contractors that improve the building envelope, interior lighting system or HVAC system of a government-owned building for energy-saving purposes. For example, if a mechanical contractor works on the control systems for an HVAC system or an electrical contractor decides where and which type of lighting to install, this company is the perfect candidate for the deduction. Subcontractors are also eligible.

Any level of government can own the building, be it a federal, state or local entity. Contract work on public K-12 schools and universities, hospitals, correctional facilities, parking garages and other buildings can qualify as well as a host of other buildings. The type of building does not matter, so long as it is owned by a public entity. Our firm alliantgroup, a leading tax service provider, has helped contractors and construction firms claim the deduction for work on all different types of buildings.

Calculating Tax Savings

The amount of the deduction generated is based on the square footage of the building, the number of systems made energy-efficient and the degree of energy savings. The deduction can add an impressive amount for contractors that have worked on multiple government-owned buildings or a project with a large square footage. HVAC ducts count as part of the building’s square footage, and contractors that work on these systems can earn large deductions for their work.

When energy efficiency is increased by 50% or more, contractors can earn a $1.80 per square foot tax deduction. An HVAC system installation often qualifies for the full $1.80 because of the substantial effect HVAC systems have on a building’s energy usage. Even if an AEC firm does not increase energy efficiency by 50% or more, the firm can still qualify for a partial deduction for each qualifying system (the deduction can reach up to 60 cents per square foot for each individual system – i.e. the building envelope, the HVAC system and the interior lighting system.

Benefits to Contractors

Many small and medium-sized contractors stay competitive or increase their yearly revenue by claiming 179D – and contractors and construction firms should not self-censor and assume their work cannot qualify for the deduction. I have worked with many firms that were surprised to learn that many of their projects qualified, which in some instances led to a seven-figure deduction.

For example, alliantgroup worked with a general contractor that installed HVAC retrofits in K-12 schools. This contractor worked on dozens of schools in 2015 and qualified for a significant six-figure deduction. alliantgroup also worked with a mechanical contracting company that had over one hundred qualified projects. The contractor had improved the energy efficiency of multiple buildings in multiple ways: installing demand control ventilation and energy recovery ventilators, replacing boilers with high efficiency ones and adding geothermal heat pumps.

Baseline Standards

Many of this contractor’s projects were able to qualify because the 179D deduction is technology-neutral. Congress chose not to make rules about how a building should reduce its energy usage. Instead, the deduction simply rewards reduction in energy cost consumption tied to HVAC, interior lighting or the building envelope. The IRS uses 2001 ASHRAE standards (for buildings placed in service prior to 2016) or ASHRAE 2007 standards (for buildings placed in service in 2016) as the baseline standard to determine energy cost reduction. Many state and local building requirements are more stringent than ASHRAE standards, so even a basic HVAC installation or upgrade could easily surpass the baseline.

Other Requirements

There are additional steps to claiming 179D. The AEC firm applying for the deduction is required to use an independent, third-party firm to review the energy-efficient improvements made to the building. Energy modeling software is used to determine the increase in energy efficiency, and certified energy calculations are needed before claiming the deduction. By utilizing a third-party firm with advanced energy modeling software, AEC firms can maximize their deduction and make sure they are claiming the full amount available for their benefit.

Contractors with any past government projects can qualify for huge savings, and though we do not know when Congress might renew 179D for 2017 and years after, businesses still have ample time to claim the deduction. Contractors have until 2019 to claim 179D for work done in 2016. Companies also can file amended returns and receive a refund for taxes paid before they claimed the deduction.

Bringing in an Expert

To ensure that the full deduction is claimed for qualified work, contractors should work with tax experts that understand HVAC and electrical work as well as the process of claiming the deduction. AEC professionals are required to receive an allocation letter from a representative of the government-owned building to transfer the tax benefit from the government entity to the taxpayer. Therefore, if a firm has made energy-efficient improvements to multiple public schools, the firm would be required to have the school district sign an allocation letter. Because there are so many types of government-owned buildings and structures, this allocation process is not one size fits all. Navigating the allocation process can be difficult and sometimes deters AEC professionals from claiming the deduction. With proper guidance and expertise, however, these allocation letters are readily signed.

It is very crucial for firms to partner with a tax provider that understands the entire process of the 179D deduction. The third-party review, in addition to the allocation letter that AEC firms will likely need, requires work with a third-party provider to help them properly claim the deduction. While these steps take time, with the right professionals, it can be a simple process for such a lucrative incentive. In such a growing industry, mechanical, electrical and general contractors need to maximize their revenue by ensuring they are paying the lowest net effective tax rate. The 179D deduction provides a powerful opportunity for tax savings, and I would encourage any contractor to take a look at their past projects and find out if they could be eligible for the deduction.

 
Valerie Ward is alliantgroup’s National Director and a member of AIA and The Green Building Council. She is a published author of numerous articles and has given several public speeches on energy incentives to national audiences. She has been instrumental in helping architecture, engineering, and contracting firms claim valuable energy deductions that help firms remain competitive and continue to improve the built environment.


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