179D, 45L, and R&D Tax Incentives

About Section 179D

The Section 179D federal tax incentive is intended to promote the design and construction of energy-efficient commercial buildings.  The amount of the incentive is determined by the efficiency measure installed and the amount of the projected energy savings achieved. The following Q&As provide additional information about this valuable tax incentive:

  • What is the 179D Incentive?

    Section 179D provides for the immediate expensing of $0.30 to $1.80 per square foot for qualifying energy-efficient projects in commercial buildings. This provides an immediate tax benefit to building owners who must otherwise deduct these costs over 39 years.


  • What are the Effective Dates for Claiming the Incentive?

    The provision is effective for private property (new or retrofit) placed in service, 1/1/20 and later, and for local, state, or federal public buildings (new or retrofit) placed in service in the last 3 open tax years.

  • What Types of Buildings are Eligible for the 179D Incentive?

    All commercial buildings, parking garages, and multi-family residential buildings (greater than three stories), whether privately or government-owned, qualify for the deduction. The property must be located within the United States.


    Buildings eligible for the 179D incentive include commercial office buildings, warehouses, distribution centers, retail stores, nursing homes, hotels, motels, apartment buildings (greater than three stories), schools, universities, dormitories, federal and state office buildings, courthouses, post office buildings, military bases, airports, etc.


  • Who Can Claim the Incentive?

    The tax incentive can be claimed by a building owner, tenant or ESCO, depending on who pays for and owns the energy efficient commercial property.  For government-owned buildings, the incentive can be claimed by the architect, engineer, contractor, environmental consultant, sales engineer or energy services provider responsible for the design of the energy-efficient system. At the present time, non-profit entities (e.g., not-for-profit hospitals) are not eligible for the incentive.


    Although REITs are are technically eligible for the incentive, they are generally unable to benefit from Section 179D due to the intricacies of REIT taxation.


  • How Do I Claim the Deduction?

    In order to claim the deduction, a Section 179D compliance study (“a Section 179D Certification) must be performed by an independent firm or individual to verify the deduction.

    The energy savings projected for the measure installed must be confirmed through energy modeling based on specific standards outlined by the IRS.

    The deduction is then claimed on the “Other Deductions” line of the taxpayer’s federal tax return.  IRS Revenue Procedure 2011-14 now makes it possible to take the Section 179D tax deduction for qualifying projects already installed 2006 by way of an automatic "change of accounting" method on the next regular tax filing, without amending prior year tax returns. Previously, taxpayers either had to take the deduction in the current tax year, or for properties placed "in service" in prior years, it required filing an amended tax return.

About Section 45L


In 2005, President Bush signed into law the Energy Policy Act of 2005. This act includes the Energy Efficient Home Tax Credit known as section 45L which provides a tax credit for each qualifying new energy efficient residence and multi-residential building built between August 8, 2005 and December 31, 2020. Renovations and rehabilitations to older buildings may also qualify. The tax credit amounts to $2,000 per residence. Further, since the 45L benchmark was based on earlier standards, most recently built homes and multi-dwelling units already exceed the standards to qualify.

What Qualifies? 

  • Traditional Homes
  • Apartment Complexes (each unit)
  • Condominiums (each unit)
  • Assisted Living Facilities
  • Apartment with 50 units = $100,000 tax credit

Qualifying Resident Requirements 

  • Located in the United States. 
  • Construction was substantially completed after August 8, 2005 and before December 31, 2020. Construction includes renovations and rehabilitation. 
  • The residence is a “dwelling” unit that provides complete living facilities for one or more persons within a building that is not more than three stories in height. 
  • The residence must have a projected level of annual heating and cooling energy consumption that meets the IRS standards. 

R&D

The Research and Development Tax Credit (“R&D Credit”) was enacted in 1981 as part of the Economic Recovery Act. The R&D Credit has been renewed and extended every two years since its original enactment, until it became a permanent part of the tax code in 2016. The R&D Credit allows companies, large and small, to claim a dollar for dollar reduction in tax liability for conducting qualified research within the United States, as identified by examining qualifying research activities and expenditures related to employee wages, outside consulting costs, and certain material expenses. Taxpayers may claim credits back three years and carry forward unused credits for up to 20 years.

 

BASICS OF THE R&D CREDIT

When individuals think of research and development, they typically imagine a setting involving test tubes and lab coats. However, when it comes to the tax code, the definition of what may qualify as research and development is more expansive, and includes any work performed that involves design or development to create a new or improved business component.

The following four-part test outlines the requirements necessary for claiming the R&D Credit:


1. New or Improved Business Component – The taxpayer must design or develop a new or improved product, process, formula, invention, technique, or software. These are the six enumerated business components as defined in section 41 of the Internal Revenue Code.

 

2. Elimination of Uncertainty – The taxpayer must seek to eliminate uncertainty regarding the design or development of the new or improved business component. This test is commonly known as the hypothesis stage, where initial ideas and concepts are formed to eliminate unknowns to enable the taxpayer to proceed with design or development.

 

3. Process of Experimentation – The taxpayer must engage in a process of experimentation by evaluating one or more alternatives that eliminates the uncertainty encountered at the outset of design or development. This test is defined broadly to include trial and error testing, evaluating the capability of alternative ideas or concepts, and utilizing any set of broad scientific principles to overcome uncertainty encountered during design or development.

 

4. Technological in Nature – The taxpayer must base their process of experimentation on the principles of the hard sciences, such as utilizing the principles of engineering, computer science, or the life sciences.