An energy-efficient approach to projects can bring financial benefits for building owners and the construction companies that design and complete them. However, the availability of specific tax incentives and credits and the amount of potential cost savings often fluctuate with the shifting tides of government policy.
In 2020, legislative updates include adjustments to two popular programs that impact the construction industry: the Section 179D deduction and the Solar Investment Tax Credit.
Good news for builders and business owners
The spending bill passed in December 2019 included a provision to retroactively restore the Energy Efficient Commercial Building Deduction (commonly known as Section 179D) and extend it through the end of 2020. Having previously expired at the close of 2017, this valuable deduction incentivizes energy efficiency in both new and existing properties by providing a significant tax break for construction of qualifying buildings and systems.
With the tax extender now signed into law, 179D deductions are once again available to commercial building owners and tenants who invest in construction projects that include energy-efficient building envelopes, interior lighting or systems that provide heating, cooling, ventilation or hot water.
There’s an unusual and potentially lucrative twist with this deduction too; for projects involving buildings owned by federal, state or local governments or their agencies, the government that owns the property can allocate any credit a project generates to one or more taxpayers who “design” the project. The IRS offers clear guidance spelling out who can and cannot be considered a designer for allocated 179D deductions in Notice 2008-40:
“A designer may include, for example, an architect, engineer, contractor, environmental consultant or energy services provider who creates the technical specifications for a new building or an addition to an existing building that incorporates energy efficient commercial building property (or partially qualifying commercial building property for which a deduction is allowed under § 179D). A person that merely installs, repairs, or maintains the property is not a designer.”
Section 179D deductions are claimed in the year the building or system is placed in service, with the amount of the deduction determined by the square footage of the building. Whether for new construction or upgrades to an existing building or system, the maximum deduction is $1.80 per square foot with a smaller deduction available for partially qualified property.
To qualify for the deduction, construction projects must reduce energy usage to a specified fraction of established ASHRAE standards, with the relevant standard governed by the year the system or building enters service. The federal Office of Energy Efficiency and Renewable Energy provides a convenient table that lists savings requirements along with the partial credit available for projects that fulfill these standards. Energy savings that establish eligibility for a 179D deduction must be calculated by using qualified software.
This popular solar credit is fading fast
While the revival of the 179D tax deduction came as a nice surprise for construction professionals, this year also brings some less joyful news relating to energy-efficient construction incentives (although fully anticipated). In 2020 the Solar Investment Tax Credit for residential and commercial building owners drops to 26% of the cost to install a solar energy system, down from its prior level of 30%.
As an uncapped credit rather than a deduction it is a valuable incentive, but this solar-friendly tax benefit is being phased out entirely for residential owners. Plans call for a reduced credit of 22% in 2021 (both residential and commercial), followed by a 10% credit in 2022 and beyond that’s available only to owners of commercial buildings.
Taking advantage of energy incentives helps construction companies, building owners and the environment. Don’t let potential tax savings slip away, especially when they’re a result of energy conservation. Talk to the construction accounting experts at Mauldin & Jenkins today to find out how your business can benefit from these targeted tax incentives.