Section 179D project delivers six-figure reduction in tax liability
RSM’s understanding of tax opportunities delivers real savings
Our client, a diversified contracting firm offering architectural, design and construction services, had shifted from a period of significant net operating losses to a year of substantial profitability. As a result, they were looking for opportunities to reduce their tax exposure. They met with their RSM team and investigated a variety of tax-saving options. One option RSM uncovered was a significant opportunity to reduce their tax liability through a deduction under section 179D, which provides tax incentives for the design and construction of energy efficient commercial buildings.
Section 179D incentives had expired for the year in question, but were retroactively reinstated before year end. We worked with our client to assess their projects for potential opportunities. Section 179D tax incentives generally flow to the owner of the building, not to the firm that designs and constructs the property. However, our client had been the designer and general contractor for a major construction project for the Department of Defense (DoD). Because the firm’s client was a governmental entity, which does not pay tax, the section 179D tax benefits could be assigned to our client.
Our first step was to ensure that the DoD had not previously assigned the section 179D deduction for the project to any other entity involved with the project. The Treasury guidance for section 179D allows the governmental owner to allocate the deduction among several designers if more than one designer is involved. Eligible designers are those responsible for creating the technical specifications for the installation of energy efficient commercial building property. Subcontractors that merely install the property generally are not considered eligible designers. We worked with the DoD to verify our client served as the primary designer and secure an allocation letter providing the full section 179D deduction to our client.
Next, we analyzed the project itself to determine the amount of the available deduction, based on the number of qualifying components and the appropriate building’s square footage. We determined the building’s square footage by adding up the floor areas of the conditioned and indirectly conditioned spaces within the building, including basements and mezzanine.
The section 179D deduction is based on energy savings per square foot when compared to set baselines. The savings are measured in three areas:
- Building envelope
- Heating, cooling, ventilation and hot water systems
- Interior lighting systems
With the construction elements identified and the size of the project determined, we then analyzed the energy savings using modeling software approved by the Department of Energy. We had a certified licensed engineer review our complete report as required by the tax code. We then submitted our report to the DoD for approval and allocation.
As a result of this project, our client realized a deduction of $846,000, resulting in a $338,000 reduction to their tax liability (assuming a 40 percent tax rate). Due to the success of this initial project, we are working with them to review all of their project portfolios for further section 179D opportunities.