David Diaz, Managing Partner–Walker Reid Strategies.
How significant are the dollars available through a Section 179D tax deduction? Since our inception as a licensed engineering firm, my company has accumulated more than $1 billion in successfully certified Section 179D and 45L tax credits. While there are similarities between the two, the 179D tax deduction is something that has been on the radar for most architects, engineers and energy companies, especially when working on government projects.
While commercial building owners and government projects can qualify for this specific energy efficiency deduction, government-owned businesses must allocate their deduction to the design firm. While this has been of interest since its inception in 2006, the Inflation Reduction Act of 2022 upped the maximum deduction from $1.88 to $5.00 per square foot, leading to even more interest—and competition—for these dollars.
While different project contractors may incorrectly vie for these dollars, it can only be allocated to the designer. To complicate matters, it can be allocated to numerous designers to qualify per the IRS definition. My company’s experience has helped us complete hundreds of Section 179D studies and certifications, ensuring that our clients correctly pursue and claim this deduction.
How does the IRS define a Section 179D designer?
There has not always been a clear-cut answer to this question, but in 2018, the IRS released a memo explaining how to qualify as a designer under Section 179D. This memo also included eight common hypothetical examples to further clarify the ongoing confusion that has surrounded this issue.
According to the IRS memo, a qualified designer for Section 179D purposes is “a person that creates the technical specifications for installation of energy efficient commercial building property … for example, an architect, engineer, contractor, environmental consultant or energy services provider. A person that merely installs, repairs or maintains the property is not a designer.”
While there seems to be some clear delineation of how to qualify (and how not to), it’s also been a fraudulent opportunity area. In 2022, the IRS Criminal Investigation Division conducted a raid on a national accounting firm specializing in Section 179D deductions. Though IRS CI investigations are far more common, such raids are rare and involved, and would indicate that the IRS likely had some just cause for conducting such an operation.
As with virtually anything in life, there is no such thing as free money. Claiming this deduction without qualifying can become quite a headache, from the audit process to the deduction loss to the potential for financial penalties. The IRS has now allocated an additional $45 billion toward tax enforcement, and there’s some low-hanging fruit regarding Section 179D: “designers” taking the deduction that simply don’t qualify for it under the IRS guidelines.
There are ways to minimize your exposure should the IRS question whether this deduction was taken properly.
How can I minimize my exposure if questioned by the IRS?
A great way to start is to familiarize yourself with the IRS guidelines. The first is to conduct a proper assessment and evaluation of whether a designer’s work aligns with the stated IRS guidelines. The second is to thoroughly document any design work completed as well as a copy of the certification study. In the case of an audit, the IRS can clearly and quickly review the documentation.
For designers working on government-owned building projects, this should include a properly documented allocation letter from the government agency that owns the building. This letter will include specific elements and be signed by an authorized government representative. Finally, it’s prudent to also check to see if the allocation may already be claimed by another designer on the project: while the allocation can be proportionately shared, it can only be allocated once.
Successfully navigate the IRS 179D Deduction.
Those looking to successfully navigate the IRS 179D deduction should consider following the IRS bulletin. It provides a good starting point to better understand designer qualifications along with case studies based on real examples. Remember that it is the actual creation of technical specifications for the project that will qualify a designer, not a job title. Installation and maintenance of those systems are not qualifiers, which is where much of the confusion often occurs. While it may be more straightforward for architects, engineers and designers to understand if they qualify, there may be some cases in which a deeper review of the IRS statute is required.
If you chose to work with a licensed professional, note that this can be challenging for firms who lack the specific legal accounting expertise associated with Section 179 Deduction, as it is a highly specialized area of IRS tax law. Incorrectly claiming this deduction, or assuming your firm qualifies without completing the due diligence, audits and certification, can be costly in dollars and time.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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