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. The Taxpayer Certainty and Disaster Relief Act of 2020 made Section 179D permanent for tax years beginning after December 31, 2020.

Section 179D was enacted to encourage commercial building owners to install energy-efficient property. Installation of energy-efficient
commercial building property (EECBP) occurs when constructing a new, or improving an existing, commercial building or government building.

Section 179D 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 Section 179D deduction is typically included on the “Other Deductions” line of the return. The Schedule M should reflect a deduction for tax purposes, but not for book purposes.

The building owner can file Form 3115 for unclaimed Section 179D deductions for buildings placed in service in prior years. A taxpayer
claiming the deduction as a designer must file an amended return for the prior year the EECBP was placed in service because the designer does not have a method of accounting in the building in which EECBP is installed.

If you want to learn more about Section 179D, you can read the various IRS guidance on the topic. The IRS has issued the following Section 179D guidance: Notice 2006-52, Notice 2008-40, and Notice 2012-26; CCA 201451028, and AM 2010-007 and AM 2018-005. You can also read this post about the placed-in-service and holding on the allocation amount.

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 issues an allocation letter to the designer. When multiple designers are involved, they often vie for this letter.

Design responsibilities for a commercial building project are designated by contract. Each party in a construction or renovation project
should have a contract that specifies responsibilities. Typically, general contractors and designers contract with the building owner.
However, parties such as service subcontractors or material suppliers may contract with parties other than the building owner.

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.

Update: This incentive was first established in 2006 and was made permanent by the Consolidated Appropriations Act, 2021, H.R. 133, which was signed into law in December 2020.

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