The Sec. 179D Government-Owned Building Allocation

Published Categorized as Federal Income Tax, Tax, Tax Deductions
Can Defective Deed Defeat Irs Estate Tax Lien?
Can Defective Deed Defeat Irs Estate Tax Lien?

Section 179D provides an incentive for building owners to install energy efficient systems. The IRS released CCA 2018-005, which addresses one of the controversial aspects of Sec. 179D–namely, the ability for government building owners to allocate the deduction to the designer of the energy efficient property.

About Section 179D

Section 179D was enacted in 2005, as part of a package of laws intended to address the U.S.’s mounting energy problems. It provides a deduction to property owners who install “energy efficient commercial building property.”

This property includes certain energy efficient certified property installed as part of (1) an interior lighting system; (2) a heating, cooling, ventilation, or hot water (HVAC/HW) system; or (3) a building envelope. The deduction is computed based on a set dollar amount multiplied by the square footage of the building.

The Sec. 179D Allocation

The Code allows a government or nonprofit owner to allocate the deduction to the designer of the energy efficient property. There are a number of requirements that have to be met to receive this allocation. One such requirement is that the owner issue an allocation letter to the designer. When multiple designers are involved, they often vie for this letter.

The allocation is often issued to the architect, but may also be issued to the construction manager in some cases. It isn’t altogether clear when it is appropriate to issue the allocation letter to one party or the other. That brings us to the IRS’s newest guidance cited above.

The IRS’s Guidance

The IRS’s guidance addresses eight scenarios. Each scenario considers whether each party is the “designer” and whether the part of the property they designed qualifies. The guidance can be summarized as follows:

  • The determination as to whether a party can receive the benefits from an allocation letter depends on an analysis of the parties contracts.
  • The owner can allocate some or all of the benefits to the primary or other qualifying designers and can do so in full or in a lesser amount, as long as the parties design one of the enumerated systems.
  • An entity that does the installation is not likely to qualify as the designer. This is the case even if the entity created shop drawings, etc. that are not made part of the official contract documents.

While the IRS’s guidance is not the law, it can provide some level of comfort as to who is and is not entitled to Sec. 179D allocations. This will continue to be an important issue pending the issuance of regulations (which the Treasury has never issued) and if Sec. 179D is extended past 2017.

The tax incentive has been extended several times, but is currently expired. We are waiting to see if Congress extends the tax incentive again.

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