Energy efficient infrastructure projects represent a key opportunity for entrepreneurs
Dean Zerbe is the National Managing Director of alliantgroup, a Houston-based management and tax consulting firm, and a former senior legal advisor to the US Senate Finance Committee.
The COVID-19 pandemic has shown no mercy in its impact on the construction industry, causing a storm of high costs and volatility from materials to the workforce. According to a recent poll By Associated General Contractors of America and Autodesk, 93% of subcontractors have been affected by rising materials prices induced by supply chain disruptions, and 88% are experiencing project delays.
Despite this volatile environment, the sector is poised for serious growth thanks to the new infrastructure package adopted, which will lead to significant increases in the volume of projects, in particular for green construction and energy efficient buildings. The bill already contains $ 225 million for grants to states and others to implement energy building codes, and the Clean Energy for America Act scheduled for the next reconciliation bill includes more changes incentives to encourage the push towards zero-energy buildings.
Not only could government contractors benefit from an increase in public works contracts, but Congress is also seeking to improve tax incentives for companies working on government projects. For example, the 179D tax deduction for energy efficiency in commercial buildings was recently made permanent by Congress and provides a significant tax benefit to companies that have made public buildings more energy efficient.
Unfortunately, while the number of energy efficient buildings has doubled in recent periods, section 179D has been seriously neglected and underused. Let’s dive into what construction companies need to know about it, to take full advantage of the next wave of green building projects.
What is section 179D?
According to US Department of Energy, âThe building sector accounts for approximately 76% of electricity use and 40% of all primary energy use in the United States and associated greenhouse gas emissions. To encourage more energy efficient construction, Congress developed a federal resource in 2005 to financially reward these projects and allow more capital to be reinvested in environmentally friendly construction. Thus, the 179D deduction was born. It started as a temporary initiative under the bipartisan Energy Policy Act and first allowed a tax deduction for energy efficient buildings put into service between 2005 and 2008.
Congress then continued to extend the provision each year after it expired, until the end of last year when it became a permanent part of our tax code through the Consolidated Appropriations Act.
Section 179D specifically allows taxpayers to claim a deduction of up to $ 1.80 per square foot on government buildings, where work has been done to make them more energy efficient. However, buildings may also be partially eligible with deductions of up to $ 0.60 per square foot for individual lighting, building envelopes, or heating and cooling systems that meet certain target levels. For program managers, construction and architectural firms that integrate qualifying systems into multiple projects, the $ 1.80 per square foot deduction can quickly run into millions of dollars.
Unfortunately, the lack of awareness of the deduction, combined with the confusion about how to qualify and recover it, has led to the underutilization of this deduction, even as green building practices have become more common for builders. entrepreneurs nationwide. With the infrastructure plan poised to focus heavily on energy efficient buildings, the 179D could play a much bigger role in buildings seeking tax deductions.
What types of projects are eligible?
Eligible designers and builders (including program managers, construction managers, architects, engineers, contractors, environmental consultants, and energy service providers) may all have Section 179D eligible projects. These can include K-12 schools, universities, military bases, libraries, prisons, and courthouses – many of which will be built or updated after President Biden signs the Bill on infrastructure. In addition to the type of building, the equipment deployed for energy efficiency and the nature of the projects involved are all taken into account to calculate the maximum deduction.
To redeem the deduction, buildings must undergo an independent third-party review to confirm energy savings and the potential deduction. Applicants must essentially establish that the current project has reduced total energy costs by at least 50%. In addition, building improvements must exceed ASHRAE (Building Ventilation and Air Quality) 2001 standards for buildings commissioned before 2016 – and ASHRAE 2007 standards thereafter.
As an additional qualifying element, companies working on government-owned buildings are required to submit a federal award letter to qualify. This letter ultimately allows the government entity to pass the benefit to the taxpayer and it is best to use a third party team to get letters as well.
As an example of what deductions can look like, a construction management company was able to get deductions on 31 of its properties, many of which were K-12 schools, higher education buildings, and facilities. military. At least two of the projects had deductions greater than $ 1 million and the total deductions they could claim was $ 7.6 million. All this returned capital not only saves jobs and encourages the growth of construction companies working for greater energy independence, but also allows them to reinvest it in the development and implementation of building innovations. more energy efficient.
The point is that many of the projects resulting from the infrastructure bill’s capital injections will meet these standards, with the bill including $ 225 million in grants to states and others for the implementation of energy building codes. It will be up to the construction, engineering, architectural, and consulting firms involved to choose to harness and disseminate knowledge about deduction to encourage its use and, hopefully, expansion one day into one credit of the deduction. full congressional tax.