The Rules is a monthly series covering important regulations in a clear manner for architecture, engineering, and construction professionals.
Introduced as part of the Energy Policy Act of 2005, Internal Revenue Code Section 179D: Energy Efficient Commercial Buildings Deduction was recently extended to the end of 2020. Often dubbed the “Green Tax Break for Architects, Engineers, and Contractors,” 179D offers financial incentives to building owners and AEC firms for decreasing a building’s energy usage through the installation and use of high-performance systems.
Because the owner of public projects—namely the government—is a non-taxable entity and thus would not benefit from a deduction, AEC professionals themselves can claim the credit as the “designers” of a project’s energy-efficient measures.
The program applies to newly constructed or renovated commercial or multifamily buildings four stories or taller that perform 50% better than a baseline building that complies with ASHRAE Standard 90.1-2007. Many LEED-certified projects as well as recently constructed buildings prioritizing energy efficiency would likely qualify. The deduction, which is taken the year that a project is completed and occupied, requires the use of specific energy analysis software programs and the verification of energy savings by a third-party engineer.
A maximum tax deduction of $1.80 per square foot can be claimed for projects that meet the energy savings threshold in three building systems: interior lighting, envelope, and HVAC or hot water. Partial credit may also be earned. For example, “a building need only achieve a 25% reduction in lighting power density to qualify for a $0.30 per square foot deduction,” says Kathleen King, managing director and national research and development practice leader of Washington, D.C.–based management consultancy Alvarez & Marsal Taxand.
Some AEC firms have leveraged the anticipated deduction to win public construction contracts. Stuart Kaplow, a Cockeysville, Md.–based environmental attorney, says his firm has helped clients make their bids “more competitive by factoring in the allocation for a designer, which may include ‘an architect, engineer, contractor, environmental consultant, or energy services provider who creates the technical specifications.’ There are potentially many who are eligible to share in this incentive.”
A&M Taxand has also worked with architecture firms to claim this benefit. “A number of nuanced documentation requirements must be verified in order to sustain the credit,” King says. “That said, the initial estimate of a project’s potential applicability can be as simple as having a qualified 179D deduction consultant review the MEP drawings.”
Global firm HOK has benefited from 179D. “Having this sort of ‘rebate’ or tax deduction can restore a project with a so-so multiplier to one with good financial performance and renew and reinvigorate the overall firm investment capacity in high-performance design skills and tools for all our clients,” says director of sustainable design Anica Landreneau, Assoc. AIA, who is also based in Washington.
However, because the credit is continually at risk of expiring, HOK could never confidently offer a discount on design services to its clients. “It’s historically been tricky because the credit would expire and then need to be renewed by Congress in two-year cycles, which is generally longer than a design and construction cycle—particularly at the scale of projects on which we work,” Landreneau says.
Though renewal of the legislation is never certain, AIA senior vice president of advocacy and relationships Sarah Dodge says the Institute is working to make the deduction permanent. “We are focused on protecting it—and enhancing it if the opportunity presents itself,” she says. “However, the bigger risk is the deduction being struck down altogether as a cost-savings mechanism for Congress during the pandemic.”
