The Internal Revenue Code (IRC) Section 179D energy efficient commercial buildings (Section 179D) tax deduction provides financial incentives for designers (i.e., architects, engineers, design-build contractors) and building owners to implement energy-efficient designs in commercial buildings.
When it comes to reporting this deduction, it is crucial to understand that, for deductions relating to prior years, designers cannot use Form 3115 "Application for Change in Accounting Method”. Instead, the deductions must be reported on an amended tax return.
In Cannon Corp. v. Comm’r of Internal Revenue, February 18, 2025, the court determined that because a design firm did not own the property, and could not take annual depreciation deductions on it, any IRC Section 179D deduction was not an acceleration of depreciation that could be reported on a Form 3115. Instead, it was a one-time allocated deduction that would permanently reduce the design firm’s taxable income, which should have been reported on an amended income tax return.
Understanding Section 179D
IRC Section 179D allows for a tax deduction for energy-efficient commercial building property (EECBP). Designers can benefit from this tax deduction when they are responsible for the design of tax-exempt buildings that achieve energy savings exceeding standards specified American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE). The tax deduction can be significant, up to $5+ per square foot of the building, following the Inflation Reduction Act, depending on the level of energy savings achieved.
The Purpose of Form 3115
Form 3115 is used to request a change in accounting method, including changes in accounting principles, accounting for income or expense and other adjustments related to the timing of income and expenses. This form is designed to help taxpayers align their accounting methods with tax regulations and is typically used for comprehensive changes in accounting methods or correcting improper accounting practices. While not a proper procedure for designers to claim the Section 179D tax deduction, building owners claim the tax deduction this way.
Cannon Corp. v. Commissioner
The Court of Appeals upheld the U.S. Tax Court’s decision denying Cannon Corporation's attempt to retroactively claim Section 179D tax deductions on its 2011 tax return. Cannon aimed to report deductions for 2007 – 2010 as a change in accounting method under Revenue Procedure 2011-14. However, the Internal Revenue Service (IRS) clarified in Revenue Procedure 2012-39 that these tax deductions could not be claimed this way.
The court ruled that these deductions did not qualify for adjustment under Section 481(a) as they did not represent a change in accounting method. Cannon's equitable claims, such as equitable estoppel and equitable recoupment, were rejected for lacking merit. The court found no misrepresentations by the Commissioner and concluded that Revenue Procedure 2011-14 did not require Cannon to report the deductions as claimed. Thus, the appeal was denied, affirming the 2011 tax deficiency determination.
Why Form 3115 Is Not Suitable for Designers With Section 179D Adjustments
- Nature of the Deduction: IRC Section 179D is a specific deduction related to energy-efficient building design. It is not an accounting method that needs to be changed or adjusted, but rather a tax incentive that must be claimed correctly. Form 3115 is not designed for claiming or amending deductions of this nature.
- Complexity and Risk: Filing Form 3115 incorrectly can lead to complications, increased scrutiny from the IRS and potential penalties. Using the form for purposes other than those intended can increase the likelihood of an audit, particularly when it involves substantial deductions like those under IRC Section 179D.
- Proper Claiming Process: The correct process for claiming or adjusting the IRC Section 179D tax deduction involves ensuring that the energy savings certifications and documentation are accurate and complete. In cases where tax deductions have been missed in previous years, filing an amended return for the specific year is more appropriate than attempting to use Form 3115.
- Potential for Misinterpretation: The IRS may misinterpret the use of Form 3115 as a signal that the taxpayer is making a formal change in accounting method rather than claiming a tax deduction, which can lead to unnecessary complications and a misalignment of tax records.
Recommended Approach
For architects who need to adjust their taxes related to Section 179D deductions, the following steps are recommended:
- Accurate Certification: Ensure that all energy savings certifications meet the IRS requirements and are thoroughly documented.
- Amended Returns: If a tax deduction was missed in a previous tax year, file an amended return (Form 1040X for individuals or the appropriate form for business entities) to claim the deduction correctly.
- Consult Cherry Bekaert: Work with a tax professional who has experience with energy efficiency deductions and tax law to ensure compliance and optimize the tax benefits.
Your Guide Forward
While the IRC Section 179D deduction offers substantial tax benefits for architects, using Form 3115 to adjust taxes for this deduction is not advisable. Cherry Bekaert’s team of CPAs, engineers and attorneys can help you understand the correct processes for claiming and adjusting these deductions to help you maximize benefits without encountering unnecessary risks or complications.
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