Originally Published 2010
By Gary L. Cole AIA, Esq.
[Disclaimer: Nothing in the following article should be construed as legal or accounting advice, nor endorsements of any parties referenced within – the contents are entirely the opinion of the author. Parties interested in learning more should always consult their tax, legal and other professionals for specific advice and information.]
Architects, engineers, contractors and other designers of energy-efficient public projects may be eligible for substantial tax benefits under the Energy Policy Act of 2005 – though it appears than many are unaware of this opportunity to effectively increase their project compensation.
Under Section 179D of the Internal Revenue Code (the “IRC”) – created as a part of the Energy Policy Act of 2005 – owners of energy-efficient commercial buildings, which generally includes federal, state and local properties, may take a tax deduction of up to $1.80/SF square foot of qualifying construction. The $1.80/SF maximum deduction is allocated at $.60/SF for each of the three following improvements: (1) the interior lighting system; (2) the heating, cooling, ventilating, and hot waters systems; and, (3) the building envelope.
While that’s great for owners of income-producing commercial properties – how does it help architects, engineers, contractors and other designers increase their compensation on such projects?
In an apparent effort to incentivize the design and construction of green public buildings, Section 179D of the IRC includes a clever provision that allows owners of “Government-Owned Buildings” to “. . . allocate the § 179D deduction to the person primarily responsible for designing the property (the designer).”
In other words, since the federal, state or local agency that owns the energy-efficient building doesn’t pay income taxes – and therefore doesn’t need and can’t take tax deductions – they can allocate their tax deducations to the “designer” (defined as “. . . the person that creates the technical specifications for installation of energy efficient commercial building property . . .”) of the building.
Let’s do the math. Suppose the “designer” designs a 100,000 SF building that qualifies for the maximum deduction of $1.80/SF. Since 100,000 multiplied by $1.80 equals $180,000, the owner can allocate a tax deduction of $180,000 to the designer.
Nice as this is, it’s important to understand . . . that a $180,000 tax deduction doesn’t equal $180,000 cash as it might in the case of a dollar-for-dollar tax credit. A tax deduction lowers a taxpayer’s taxable income by the amount of the deduction. The cash value of a deduction is then, roughly calculated by determining how much in taxes a taxpayer does not pay by virtue of having taken a tax deduction that lowers their gross income. However, in some cases, depending on when the subject building was placed in service and a designer’s particular income and tax history, they may be able to file an amended tax return for an immediate refund.
A certification of the project, made by qualified individuals, is also required to establish that the property meets the IRC’s energy efficiency requirements. Companies such as Engineered Tax Services provide assistance in obtaining such certifications, as well as providing other accounting/engineering services (contact Cyndi Lucas at firstname.lastname@example.org for more information).
Also, while the IRC specifies the form of the written allocation of the deduction to be made by the building owner, it doesn’t appear to require an owner to make it since the language says that an owner may, not shall make the allocation. Architects and other designers may consider negotiating provisions in their service agreements that require owners to properly allocate any tax deductions to them – something always best negotiated before the services are commenced than after.
Naturally, nothing is simple when dealing with tax issues and architects and other designers . . . should consult their tax and legal professionals to understand how to qualify for this benefit – the requirements are complex and precise – and beyond the scope of this article. And, what the Government gives, the Government shall also take away as this tax benefit is currently set to expire in 2013.
In the meantime, however, architects and other parties who qualify as “designers” may be able to enhance their compensation on energy-efficient public projects by availing themselves of these tax benefits.