A 179D energy-efficiency tax deduction may be allocated to architects, engineers, and designers, but navigating the complexities of a claim without guidance could be costly.
A 179D tax deduction is a federal incentive that rewards energy-efficient construction and design. It’s often claimed by a property owner and/or developer, but if the property owner is a tax-exempt entity they may allocate the deduction to the energy-efficient system’s designer, such as an engineer, architect, or other professional.
Architects, engineers, and other designers who can claim the 179D deduction via allocation but try to navigate the complexities of the claim without expert guidance could end up with costly errors. A major object lesson took place last September in the case of United States v. Oehler, et al, when the U.S. District Court for Northern Illinois affirmed the disallowal of a lighting contractor’s deduction.
Background
A 179D deduction may be allocated to a designer working on tax-exempt-owned properties or government buildings, such as K-12 schools and universities, nonprofits, hospitals, religious institutions, military bases, and tribal-owned properties. There can be more than one qualifying design professional on a project.
Form 7205 is used to claim the 179D tax deduction. When the deduction is being allocated to a designer, the designer must complete the form’s final section, providing the building owner’s name, the allocation date, and the name and address of the owner’s representative authorized to complete the allocation.
When it comes to who qualifies as a “designer,” Notice 2008-40 says the following:
“A designer is a person that creates the technical specifications for installation of energy efficient commercial building property … A designer may include, for example, an architect, engineer, contractor, environmental consultant, or energy services provider who creates the technical specifications … . A person that merely installs, repairs, or maintains the property is not a designer.”
United States v. Oehler
John Oehler and his wife Sharon are the owners of Broadway Electric Inc. (BEI), an electrical contracting company. In 2013, they upgraded lighting fixtures in 28 Chicago public schools. They later claimed that this activity qualified for the 179D deduction and subsequently amended their return, receiving a refund of over $450,000.
The workflow was as follows:
- The Chicago School District hired architects to prepare plans for converting the existing T12 lighting fixtures to more energy-efficient T8 fixtures.
- The architect responsible for each school studied building plans and created new floorplans and lighting tables identifying the fixtures that needed attention.
- Engineering firms then provided BEI with detailed specifications for the work.
- BEI replaced and installed new fixtures, lamps, ballasts, and lenses, according to plans the architects had created.
The arguments were as follows:
- The government argued that BEI didn’t “design” anything. They only executed the architects’ designs. They didn’t create any technical specifications themselves.
- BEI claimed that while they may not have designed the original specifications, they created additional specifications by identifying additional fixtures that needed retrofitting or replacement. They were not able to supply any documentation to corroborate this claim. In fact, they did not have the ability to modify specifications without authorization from the architects.
As stated in the section of the code presented above, “A person that merely installs, repairs, or maintains the property is not a designer.” BEI was deemed to have merely installed the system in this case. As such, their work was not eligible for the 179D deduction.
Lessons Learned
Working with an experienced 179D deduction professional can make the difference between a successful claim and one that is disallowed. DIY tax deduction in these situations can be tricky for several reasons:
- Understanding who qualifies as a “designer” under Section 179D is not as simple as taxpayers might imagine. If code definitions are misinterpreted, costly errors could result.
- Successfully claiming the 179D deduction requires rigorous documentation of compliance with energy-efficiency standards. If said documentation cannot be provided, this may hinder the claims process.
If you’re an architect, engineer, contractor, or taxpayer interested in claiming a 179D deduction, reach out to an expert. They know the pitfalls and how to avoid them.
Gina Maurino is a business development manager at Capstan Tax Strategies. She works closely with taxpayers and accounting firms to provide practical, creative, and customized engineering-based tax solutions. Maurino can be reached at gmaurino@capstantax.com.
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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.
