The Section 179D incentive for energy-efficient commercial buildings has been a powerful tax program for the design and construction industry for many years. Companies who work on government-owned facilities can claim the deduction for projects that impact the HVAC and hot water, interior lighting, and building envelope systems by receiving an allocation letter from the government building owner. In 2023, tax-exempt entities will also be eligible to allocate the Section 179D deduction for their projects.
Section 179D tax code states that an allocation letter may be given to a designer in that a taxpayer creates the technical specifications for installing energy-efficient commercial building property. It continues by stating a designer may include, for example, an architect, engineer, contractor, environmental consultant, or energy service provider. But how does a contractor or other non-traditional designer qualify for Section 179D? Below are a few examples of how these entities can meet the eligibility requirements for Section 179D.
Design-Assist
Design-assist is a project delivery method where construction team members are contracted to work hand-in-hand with the architects and engineers during the project’s design phase. Participation of the construction team during the design phase allows the general contractor, subcontractors, or construction manager a chance to provide their expertise. Eligibility can occur when the construction team applies their knowledge of constructing the HVAC and hot water, lighting, and/or building envelope systems to finalize the design.
Delegated Design
Delegated design is a specialized contract type where the design responsibility of a specific element of the project is assigned to a contractor. Delegated design requires a contractor to retain a licensed design professional who will ultimately sign and seal the design and calculations of that element. For Section 179D, delegated design of the three energy-efficient systems can meet the eligibility requirements.
Design-Build
Design-build is a project delivery method that allows the owner to contract with one company to provide design and construction services for the project. The design-build contractor is responsible for the project’s design and construction phases and will contract entities needed to complete each step. The design-builder’s detailed involvement and ultimate responsibility for the project design often make them eligible candidates to claim the Section 179D deduction.
Direct to Owner
A building owner may elect not to engage a design team and instead contracts directly with a contractor to complete a project. This may be due to several things, including the size of the project or in-house expertise on staff. If the building owner provides insufficient information, the contractor may be responsible for identifying deficiencies in the building systems and proposing the project scope to correct these issues. They may also be responsible for selecting equipment or materials that meet specific energy efficiency goals and preparing the associated technical specifications. The responsibilities assumed by the contractor and the technical requirements they create as a result of these responsibilities can make them eligible for Section 179D.
These scenarios make up a few ways that contractors can be eligible to receive the Section 179D deduction. It is essential to partner with a Section 179D provider knowledgeable about the construction industry and each entity’s different roles and responsibilities. Calvetti Ferguson has engineers on staff with experience in the design and construction industry and delivering the Section 179D incentive. Our team has the expertise to discuss your projects in depth and identify potential tax savings opportunities.
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Calvetti Ferguson has licensed CPAs and professional engineers who can guide you through the entire Section 179D process. Unlike other firms, we have tax and design industry expertise and can provide tax planning services while reducing your tax liability through this powerful incentive. We work with all sizes and types of firms and are ready to assist you and your clients.