With filing deadlines quickly approaching and everyone thinking about their yearly tax returns, we wanted to remind construction companies of a potentially lucrative opportunity.
In recent years, green construction has become a booming multibillion dollar industry, and according to the numbers, it is a trend that is likely to stay. The U.S. Green Building Council recently estimated that just this past year 3.6 billion sq ft of building space was deemed LEED certified. Pulling from prior studies, the council also anticipates that nearly half of new nonresidential construction by value will be green this year (www.usgbc.org/articles/green-building-facts). For reasons relating to both value and sustainability, the construction industry is moving toward green initiatives. Green initiatives have perhaps become so common that most contractors fail to recognize them in their day-to-day projects — and thanks to one government-sponsored tax incentive — these very same initiatives could hold the key to a successful tax season.
179D: Why It Pays to Be Green
Originally passed by Congress as part of the 2005 Energy Policy Act, the Energy Efficient Commercial Building Deduction — better known as Section 179D — benefits architects, engineers and contractors of all sorts (be they general, mechanical, electrical, etc.) whenever they make energy-efficient improvements to buildings owned by the government. For any business improving the energy efficiency of buildings owned by government entities at the federal, state or local levels, that business can receive a tax deduction of up to $1.80 per square foot, providing an obvious value depending on the size and scope of the company’s building projects. Systems eligible for the deduction include the interior lighting, HVAC and hot water systems as well as enhancements made to the building’s envelope.
How valuable can 179D be for eligible contractors? For two years’ worth of enhancements made to buildings as diverse as high schools, elementary schools, hospitals, municipal facilities and recreation centers, one construction services company received more than $2 million in federal tax deductions. This is a high-end result for sure, but generally the more building projects you have, the larger those buildings are and the more eligible systems you make energy efficient, the higher your deduction will be.
The Rewards of Energy Efficiency
“I first heard about the 179D deduction by networking with my peers in the construction industry. As a construction contractor, the tax savings accrued from 179D advanced our business in many ways, allowing us to reinvest in both manpower and equipment,” says Tom Kader, president of Sedalco Construction Services.
Founded in 1983, Sedalco Construction Services is yet another 179D success story. A company that represents a broad spectrum of industries and business sectors, Sedalco runs the full gamut in terms of construction services, offering everything from pre-project planning and consulting to general contracting services. For making energy-efficient enhancements to a junior high school, correctional facilities and law enforcement centers, the company was able to generate a tax deduction significant enough to provide for further reinvestment, opening the door for Sedalco to hire additional employees and invest in other aspects of their business. How did they do it? For simplicity’s sake, let’s take a look at only one of Sedalco’s qualifying building projects — the previously mentioned junior high school — to see how they were able to qualify for the full deduction under 179D.
A Walk through to Tax Savings
To qualify for the full $1.80 per square foot deduction, Sedalco improved the junior high school’s following systems:
HVAC: To improve the efficiency of the building’s heating, ventilation and air conditioning systems, Sedalco added both rooftop units and energy recovery units.
Interior Lighting: To make the interior lighting more energy efficient, Sedalco installed new lighting fixtures and implemented an energy saving lighting schedule. The latter was done by installing occupancy sensors and through bi-level switching.
Building Envelope: Finally, insulation and energy reducing windows were installed in the building’s envelope to reduce heating and cooling — and by extension, the energy necessary to run the HVAC systems.
179D: For All Contractors
As you can see, none of the improvements that Sedalco implemented were overly complicated. In fact, they are typically in line with the everyday projects that contractors typically complete on a daily basis, hitting home that energy efficiency is more than just windfarms and solar panels. As long as the improvements surpass 2001 ASHARE standards (standards that most state codes already surpass) then contractors are fully entitled to claim 179D tax savings. For general, mechanical and electrical contractors, 179D represents a great opportunity to bring added value back to their companies, many times for the projects they are completing on an everyday basis. A wide-range of government-owned buildings (be it schools, universities, office buildings, airports, etc.) can qualify for 179D, so keep this in mind as you sort through your building projects this tax season. With green initiatives becoming such a high priority for the construction industry, make sure you are taking full advantage of your projects before filing this year’s returns.