Dean Zerbe is the national managing director of Houston-based management and tax advisory firm alliantgroup and former senior counsel for the US Senate Finance Committee.
The COVID-19 pandemic has shown no mercy in its impact on the construction industry, causing a storm of high costs and volatility from materials to labor. According to a recent survey conducted by Associated General Contractors of America and Autodesk, 93% of contractors have been impacted by rising material prices induced by supply chain disruption, and 88% are experiencing project delays.
Despite this volatile environment, the sector is set to experience strong growth thanks to the new infrastructure package adopted, which will lead to a significant increase in the volume of projects, in particular for green construction and energy-efficient buildings. The bill already contains $225 million for grants to states and others to implement building energy codes, and the Clean Energy for America Act earmarked for the next reconciliation bill includes more incentive changes to encourage the push towards zero-energy buildings.
Not only could government contractors benefit from increased public works contracts, but Congress is also seeking to strengthen tax incentives for companies that work on government projects. For example, the 179D Commercial Building Energy Efficiency Tax Deduction was recently made permanent by Congress and provides a massive tax benefit to companies that have made government buildings more energy efficient.
Unfortunately, while the number of energy-efficient buildings has doubled in recent times, Section 179D has been severely neglected and underutilized. Let’s dive into what construction companies need to know about it, to take full advantage of the next wave of green building projects.
What is Section 179D?
According to the U.S. Department of Energy, “the buildings sector accounts for approximately 76% of electricity consumption and 40% of all primary energy consumption in the United States and associated greenhouse gas emissions” . To encourage more energy-efficient construction, Congress developed a federal resource in 2005 to financially reward such projects and allow more capital to be reinvested in environmentally friendly buildings. Thus, the 179D deduction was born. It began as a temporary initiative under the bipartisan Energy Policy Act and initially allowed a tax deduction for energy-efficient buildings commissioned between 2005 and 2008.
Congress then continued to extend the provision each year after it expired, until late last year, when it became a permanent part of our tax code through the Consolidated Appropriations Act.
Section 179D specifically allows taxpayers to claim a deduction of up to $1.80 per square foot on government buildings where work has been done to make them more energy efficient. However, buildings may also be partially eligible with deductions of up to $0.60 per square foot for individual lighting, building envelope, or heating and cooling systems that meet certain target levels. For program managers, construction and architectural firms that integrate qualification systems into multiple projects, the $1.80 per square foot deduction can quickly add up to millions of dollars.
Unfortunately, lack of awareness of the deduction, combined with confusion about how to qualify and redeem it, has led to this deduction being underutilized, even as green building practices have become more common for entrepreneurs nationwide. With the infrastructure plan set to focus heavily on energy-efficient buildings, 179D could play a much bigger role in buildings seeking tax deductions.
What types of projects are eligible?
Eligible designers and builders (including program managers, construction managers, architects, engineers, contractors, environmental consultants, and energy service providers) can all have Section 179D eligible projects. These can include K-12 schools, universities, military bases, libraries, prisons and courthouses – many of which will be built or updated after President Biden signs the infrastructure. In addition to the type of building, the equipment deployed for energy efficiency and the nature of the projects involved are all taken into account to calculate the maximum deduction.
To redeem the deduction, buildings must undergo an independent third-party review to confirm energy savings and potential deduction. Applicants must essentially demonstrate that the current project has reduced total energy costs by at least 50%. In addition, building improvements must exceed ASHRAE (Building Ventilation and Air Quality) 2001 standards for buildings commissioned before 2016 – and ASHRAE 2007 standards thereafter.
As an additional qualification item, companies working on government-owned buildings are required to submit a federal allowance letter to be eligible. This letter ultimately allows the government entity to transfer the benefit to the taxpayer and it is best to use a third party team to obtain letters as well.
As an example of what deductions can look like, a construction management company was able to get deductions on 31 of its properties, many of which were K-12 schools, higher education buildings and facilities. military. At least two of the projects had deductions over $1 million, and the total deductions they could be entitled to were $7.6 million. All this recovered capital not only saves jobs and encourages the growth of construction companies striving to achieve greater energy independence, but also allows them to reinvest it in the development and implementation of new projects. more energy-efficient building innovations.
The fact is that many projects resulting from the capital injections of the infrastructure bill will meet these standards, with the bill including $225 million in grants to states and others for implementing building energy codes. It will be up to the construction, engineering, architectural and consulting firms involved to choose to harness and disseminate the knowledge about the deduction to encourage its use and hopefully its one day expansion into a business credit. full congressional tax.