Beginning January 2022, more A&E firms may qualify for the 179D energy efficient tax deduction with the expected passage of the Reconciliation Bill. If your A&E firm has not looked into the 179D tax deduction, or previously did not qualify, you should evaluate design projects from 2021 through 2025 to determine eligibility.
Listen to Scott Duda, Partner and Leader of Cherry Bekaert’s Professional Services Industry practice, and Ron Wainwright, Strategic Tax Advisory Partner with the Firm’s Credits and Accounting Methods practice, to learn about proposed legislation that will lower the energy efficiency standards while increasing the deduction rate and the tax incentives that the 179D energy tax deduction offers to A&E firms.
Topics covered:
- Status of pending legislation impacting 179D
- Update on proposed changes to 179D
- Steps A&E firms should take now to maximize 179D deductions
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SCOTT DUDA: Welcome to today's podcast. Today we have an update on Section 179D for A&E. I'm Scott Duda, a partner in our Raleigh market, and I lead our Professional Services industry.
SCOTT DUDA: With me today is Ron Wainwright, a partner in our Credits and Accounting Methods group. Thanks for joining us, Ron.
RON WAINWRIGHT: Thank you, Scott. I look forward to our conversation.
SCOTT DUDA: In our prior podcast on Section 179D, we discussed the infrastructure bill and its implications for A&E firms. Can you give us an update on where we stand with passage of the infrastructure bill and the budget resolution?
RON WAINWRIGHT: That is a multi-trillion dollar question that tax practitioners, CPAs, and taxpayers are awaiting to see resolved in D.C. I'll give an update on where I think we stand prior to year-end on both the infrastructure bill and the budget resolution.
RON WAINWRIGHT: The debt ceiling was a key aspect of negotiations in Washington, D.C., and that was ultimately postponed until December 3. The expectation had been that we would see passage of infrastructure and the budget resolution prior to the end of October or November, with tax legislation by December 3.
RON WAINWRIGHT: The reality is Senator Manchin recently indicated he does not believe anything can be done on the House or Senate side given his negotiations. I expect the infrastructure bill and the budget resolution will occur, likely in early to mid-December.
RON WAINWRIGHT: Instead of the $3.5 trillion package referenced in the budget resolution, the package will likely be between $1.5 trillion and $1.8 trillion. We are all anxiously awaiting the outcome.
SCOTT DUDA: One of the budget resolution changes we're watching closely is the energy efficiency deduction, Section 179D. What tax planning opportunities does that create for A&E firms?
RON WAINWRIGHT: From an A&E industry perspective, this is a major focus. The budget resolution contains 13 key green energy policy provisions, and Section 179D is one of the more substantive measures.
RON WAINWRIGHT: An A&E firm can, through designing energy-efficient improvements in three building components—mechanical systems, lighting, and the building shell—receive, via a transfer, a phantom tax deduction up to a maximum of $1.80 per square foot. That's $0.60 per element for shell, mechanical, and lighting, provided the systems meet applicable energy efficiency standards.
RON WAINWRIGHT: The proposed change, which has bipartisan support, would increase the $0.60 per element (or $1.80 total) to $1.00 per element, resulting in a $3.00 per square foot maximum. Thus, beginning January 1, 2022, architectural and engineering firms could transfer square footage times $3.00 per square foot as a phantom tax deduction to reduce tax liability.
SCOTT DUDA: Does that increase in the per-square-foot benefit come with higher energy efficiency standards? Are they raising the qualification bar?
RON WAINWRIGHT: That's an excellent question and a common misperception. Under the proposed legislation, expected in early to mid-December, Section 179D remains permanent in the statute at $1.80 per square foot based on the ASHRAE 90.1-2007 standard.
RON WAINWRIGHT: A&E firms typically design systems that perform well above the ASHRAE 90.1-2007 baseline. Interestingly, the proposed legislation actually lowers the required performance threshold rather than raising it.
RON WAINWRIGHT: Currently, to qualify for the $0.60 per element ($1.80 total), a building must achieve greater than 50% improvement over the ASHRAE 90.1-2007 standard. The proposed legislation reduces that threshold from 50% to 30%, while the ASHRAE standard itself remains unchanged, effective January 1, 2022.
RON WAINWRIGHT: In short, the proposal increases the dollar benefit from $1.80 to $3.00 per square foot while lowering the performance threshold from 50% to 30%, creating a significant planning opportunity amid anticipated tax rate increases.
SCOTT DUDA: So a firm that evaluated this in 2019 or 2020 and found the hurdle too high might qualify in 2022 if they revisit the analysis. Is that fair?
RON WAINWRIGHT: Absolutely. The 13 green economy policy pillars aim to broaden access to the energy efficiency deduction for A&E firms and others. Because the threshold is lowered, clients and prospective clients should evaluate eligible projects now for year-end and future planning.
RON WAINWRIGHT: Projects that did not qualify under the greater-than-50% standard through December 31, 2021, may qualify in 2022 when the threshold moves to 30% and the benefit increases from $1.80 to $3.00 per square foot. This is a meaningful tax planning opportunity that firms should assess now.
SCOTT DUDA: Given the shifting timeline toward mid-December, what should A&E firms be thinking about now to plan for the proposed increase in Section 179D?
RON WAINWRIGHT: A&E firms should review all projects currently designed or under design that will be placed in service in 2022, since the proposed legislation would be effective January 1, 2022.
RON WAINWRIGHT: Evaluate projects from 2019, 2020, and 2021 that will be constructed and placed in service in 2022 to determine whether they can capture the benefit when placed in service under the potential legislation.
RON WAINWRIGHT: As you plan 2021 projects, also consider 2023 and 2024 so you can perform proactive tax planning and model cash flow under the increased rate structure and anticipated infrastructure investment.
RON WAINWRIGHT: Because this provision is expected to be permanent, there is substantial opportunity to evaluate and prospectively claim this benefit.
SCOTT DUDA: Thank you, Ron. There's a lot in flux, and this is a significant planning opportunity. Our contact information is included with the podcast. Please reach out if you have questions, and we appreciate the opportunity to be your guide forward.
