TAX INFORMATION ARCHITECTS SHOULD KNOW - PART 2
By: James K. Zahn, Esq., FALA, FAIA
This article is a follow up to my previous article “Tax Information Architects Should Know” in which I discussed the basics of a Section 179D tax deduction for architects of energy efficient publically owned commercial buildings. A Section 179D deduction can be confusing to the architect attempting to obtain it. I asked Chuck Pinkerton and Julio Gonzales, IRS “qualified” individuals with Engineered Tax Services, to help me in the preparation of this article to clarify how the process of obtaining the tax deduction works. I believe this information may be of substantial financial benefit to architects designing publically owned energy efficient commercial buildings. Private building owners regularly claim the Section 179D deduction for themselves, with the architect obtaining no tax benefit from the deduction under that circumstance. This article applies only to publically owned energy efficient commercial buildings.
Public Buildings & Tax Deductions?
Public entities pay no income taxes, therefore the energy tax deduction allowed for under Section 179D, cannot really benefit them. For energy efficient commercial building expenditures made by a public entity, the Secretary of the Treasury promulgated regulations that allows the energy tax deduction to be allocated to the “person primarily” responsible for designing the property in lieu of the public entity. This allocation constitutes a substantial benefit to the architect, the “person primarily” responsible for designing the project.
How EPAct works in Government Projects:
EPAct contains a tax provision intended specifically to help the government sector save energy. The law provides an incentive to designers to incorporate today’s energy efficient products into their designs for government buildings. In the beginning, the architectural and engineering community had a hard time grasping this incentive because it is the first building-design tax incentive ever offered in the Internal Revenue Code. As designers have learned about the incentive they have become eager to use it. “Government” includes federal, state and local governments, including K-12 public schools. Although virtually all government building categories have benefitted from this incentive, the most frequent uses are for K-12 public schools, state universities and colleges, and parking garages. Other common categories include post offices, military bases, libraries, courthouses, hospitals and airports. ( International Parking Institute, September 2008).
Basic Process to Obtain a Section 179D Deduction:
My previous article addressed various steps necessary to obtain the tax deduction. After the architect receives the energy tax allocation from the public owner as the designer of the energy efficient commercial building, the architect can then retain an independent energy tax consultant, qualified by the IRS, who will then use specific government approved software programs to compute the energy-efficiency of (1) the building envelop, (2) the lighting system, and (3) the HVAC and hot water plumbing systems, to determine if the project’s energy efficiencies entitle the Architect to any of the three categories of tax deductions. The listing of government approved software programs is contained in Section 4, Internal Revenue Bulletin 2008-14, Notice 2008-40, April 7, 2008 and states the following:
SECTION 4. LIST OF APPROVED SOFTWARE PROGRAMS
.01 In General. The Department of Energy creates and maintains a public list of software that may be used to calculate energy and power consumption and costs for purposes of providing a certification under section 4 of Notice 2006-52. This public list appears at http://www.eere.energy.gov/buildings/info/tax_incentives.html.
SECTION 4. CERTIFICATION (Notice 2006-52, June 26, 2006)
Before a taxpayer may claim the § 179D deduction with respect to property installed on or in a commercial building, the taxpayer must obtain a certification with respect to the property. The certification must be provided by an independent licensed qualified individual and satisfy the requirements of §179D(c)(1). A taxpayer is not required to attach the certification to the return on which the deduction is taken. However, § 1.6001-1(a) of the Income Tax Regulations requires that taxpayers maintain such books and records as are sufficient to establish the entitlement to, and amount of, any deduction claimed by the taxpayer. Accordingly, a taxpayer claiming a deduction under § 179D should retain the certification as part of the taxpayer’s records for purposes of §1.6001-1(a) of the Income Tax Regulations. A certification will be treated as satisfying the requirements of § 179D(c)(1) if the certification contains all of the following:
.01 The name, address, and telephone number of the qualified individual.
.02 The address of the building to which the certification applies.
.03 One of the following statements by the qualified individual:
(1) Statement for energy efficient commercial building property: The interior lighting systems, heating, cooling, ventilation and hot water systems, and building envelope that have been, or are planned to be, incorporated into the building will reduce the total annual energy and power costs with respect to combined usage of the building’s heating, cooling, ventilation, hot water, and interior lighting systems by 50 percent or more as compared to a Reference Building that meets the minimum requirements of Standard 90.1-2001.
(2) Statement for energy efficient lighting property that satisfies the requirements of the permanent rule of section 2.03(1)(a) of this notice: The interior lighting systems that have been, or are planned to be, incorporated into the building will reduce the total annual energy and power costs with respect to combined usage of the building’s heating, cooling, ventilation, hot water, and interior lighting systems by 162/3 percent or more as compared to a Reference Building that meets the minimum requirements of Standard 90.1-2001.
(3) Statement for energy efficient lighting property that satisfies the requirements of the interim rule of section 2.03(1)(b) of this notice: The interior lighting systems that have been, or are planned to be, incorporated into the building satisfy the requirements of the interim rule of section 2.03(1)(b) of Notice 2006-52.
(4) Statement for energy efficient heating, cooling, ventilation, and hot water property: The heating, cooling, ventilation, and hot water systems that have been, or are planned to be incorporated into the building will reduce the total annual energy and power costs with respect to combined usage of the building’s heating, cooling, ventilation, hot water, and interior lighting systems by 162/3 percent or more as compared to a Reference Building that meets the minimum requirements of Standard 90.1-2001.
(5) Statement for energy efficient building envelope property: The building envelope that has been, or is planned to be, incorporated into the building will reduce the total annual energy and power costs with respect to combined usage of the building’s heating, cooling, ventilation, hot water, and interior lighting systems by 162/3 percent or more as compared to a Reference Building that meets the minimum requirements of Standard 90.1-2001.
.04 A statement by the qualified individual that the amount of such reduction has been determined under the rules of Notice 2006-52.
.05 A statement by the qualified individual that field inspections of the building performed by a qualified individual after the property has been placed in service have confirmed that the building has met, or will meet, the energy-saving targets contained in the design plans and specifications, and that the field inspections were performed in accordance with any inspection and testing procedures that (1) have been prescribed by the National Renewable Energy Laboratory (NREL) as Energy Savings Modeling and Inspection Guidelines for Commercial Building Federal Tax Deductions and (2) are in effect at the time the certification is given.
.06 A statement that the building owner has received an explanation of the energy efficiency features of the building and its projected annual energy costs;
.07 A statement that qualified computer software was used to calculate energy and power consumption and costs and identification of the qualified computer software used (see section 6 of this notice).
.08 A list identifying the components of the interior lighting systems, heating, cooling, ventilation, and hot water systems, and building envelope installed on or in the building, the energy efficiency features of the building, and its projected annual energy costs.
.09 A declaration, applicable to the certification and any accompanying documents, signed by the qualified individual, in the following form:
“Under penalties of perjury, I declare that I have examined this certification, including accompanying documents, and to the best of my knowledge and belief, the facts presented in support of this certification are true, correct, and complete.”
What is the magnitude of the benefit?
As I mentioned in my previous article, Architects are eligible for a Federal tax benefit of up to $1.80 per square foot for the design of energy efficient public buildings placed into service after January 1, 2006. The benefits have been extended through December 31, 2013. After reading the above, you may be asking yourself if it is worth all of the effort it will take to obtain the total tax deduction. That’s a decision you will have to make for yourself. Is the design of your building project really energy efficient? If not, don’t waste your time going through this effort. On the other hand, most buildings designed by architects today are energy efficient. If that’s the case, why would you ignore the possibility of a substantial tax deduction? Any money you don’t have to pay in income taxes is money you keep.
I asked Chuck Pinkerton to specifically comment on tax benefit statistics, awareness of these tax benefits, and case studies of the energy tax benefits some of his clients have received to date. He responds as follows:
Why is the energy tax benefit not used?
Less than 2% of eligible taxpayers have filed for their energy tax benefits with the IRS.
Millions of taxpayers may be due significant refunds.
Why are taxpayers missing significant energy tax benefits and incentives?
Low Awareness- No one was previously interested during the “good” economic times.
Requires Qualified Independent Licensed Engineer with Qualified Software.
Requires Paperwork-179 D Deduction.
Goal: Energy Use,
In the US alone, Buildings account for:
72% of electricity consumption
39% of energy use
38% of all carbon dioxide (CO2) emissions
40% of raw materials
30% of waste output
14% of potable water consumption
A few examples of Architect benefits:
Government Office Building (South East) - 57,222 sf.
Architect Tax Benefit, $1.80 sf, $103,000
Middle School (Mid-Atlantic) - 54,637 sf.
Architect Tax Benefit, $1.10 sf, $60,010
High School (Mid-Atlantic) - 183,676 sf.
Architect Tax Benefit, $0.90 sf, $165,308
High School (Mid-Atlantic) - 127,440 sf
Architect Tax Benefit, $0.40 sf, $50,976
Middle / High School (Midwest) - 143,000 sf
Architect Tax Benefit, $1.20 sf, $171,600
Elementary School (Midwest) - 110707 sf
Architect Tax Benefit, $1.00 sf, $110,707
Middle School (Midwest) - 98,862 sf
Architect Tax Benefit, $0.90 sf, $88,976
(NOTE: MR. PINKERTON USED GENERIC, NOT THE ACTUAL, SCHOOL NAMES TO PROTECT THE ARCHITECT’S PRIVACY.)
Ideal Project Candidates for an Allocated Energy Tax Deduction to the Architect,
Schools, Government Buildings, Office Buildings, Retail, Commercial Buildings, Hospitality, Apartments, (four or more stories, for lease).
Who Qualifies for the deduction?
Building owners at the time of building improvements, Architects, Engineers, Contractors on Public Buildings for the taxable year that includes the date the property was placed in service.
I would like to thank Mr. Pinkerton and Mr. Gonzales for their contributions to this article, which I believe will help alert architects who design public projects to the substantial tax benefits that they may be entitled to. I am a firm believer in never looking a gift horse in the mouth. If a tax benefit exists, take it. If you fail to at least investigate this potential benefit to you and your practice, I believe you may be leaving money on the table. Again, as in the first article, please discuss this tax benefit with a knowledgeable accountant and an IRS qualified individual familiar with this type of tax deduction.
I asked Mr. Pinkerton and Mr. Gonzales if they would accept questions from our readers of this article. They have agreed to answer any questions you may have regarding Section 179D Deductions and the process required to obtain it. Engineered Tax Services, which handles over 100 certifications per month, concentrates on working with accountants and architects in analyzing and certifying that buildings, both publicly and privately owned, meet the government criteria for the energy tax credit.
For more information, please visit www.engineeredtaxservices.com or call us 1 (800) 236-6519.
Note: The preceding article is not legal or accounting advice and should not be relied upon. It is merely the authors’ opinions. It is highly recommended that you consult with your own attorney and accountant regarding any IRS Tax Code issues.