This article explains how ESCO’s and design-build contractors can use Section 179D of the tax code to land more projects in the public sector in 2020. Section 179D was previously available through 2017 but has been extended retroactively for 2018 – 2019 and for the remainder of 2020.
Based on conversations with various ESCO’s and design-build contractors, many are unaware of how Section 179D can help them win public sector business (federally/state/locally owned buildings).
The obvious question: how can Section 179D affect project economics if the public sector does not pay federal income taxes?
The answer is explained further below. Here’s a quick summary.
Section 179D – Public Sector Projects
Section 179D of the tax code was created to provide tax deductions for the installation costs related to HVAC, interior lighting, and the building envelope. The deductions are available for new construction, major renovations, and retrofits.
There is a provision in Section 179D that allows public sector entities to assign the related tax deductions to parties who provide the project design (not just installation) such as architects, engineers, ESCO’s and design-build contractors.
For ESCO’s and design-build contractors, the value of the deduction (all or a portion) can be used to subsidize a reduction in the project cost. Could this be a competitive advantage?
Important point: the assignment provisions of Section 179D do NOT apply to tax-exempt Nonprofits or any taxable entity.
Does the Assignment of Tax Benefits Ever Happen?
The answer is YES. Below are examples courtesy of Engineered Tax Services (ETS), who has supported public schools and designers in the assignment of Section 179D benefits. In fact, one designer has worked with ETS to receive over $1,000,000 of tax deductions through assignments.
How the Deduction Works
The deduction is for up to $1.80 sq ft in each of these subcategories (not to exceed the actual cost of the project):
- HVAC – $.60 sq ft,
- Interior lighting – $.30 – $60 sq ft, and
- Building envelope – $.60 sq ft.
Valuing the Section 179D Assignment: the value of the assignment can sometimes make quite an impact. Sometimes it does not. This is best illustrated with these two examples assuming the following applies to both:
- Project cost: $3,000,000
- Square footage: 800,000
- Designer: ESCO/contractor, a corporation in the 21% flat tax bracket
Example 1: assumes the only eligible Section 179D part of the installation is HVAC and it benefits only 1/2 the total facility.
Minimal impact on the bid: the deduction is $240,000 with an after-tax value of only $50,400 when assigned to the designer (2% of the overall cost of the project).
Example 2: assumes HVAC, lighting and the building envelope are all part of the total project and provides cooling for 100% of the building.
Substantial impact on the bid: the deduction is $1,440,000 with an after-tax value of $302,400 when assigned to the contractor (10% of the overall cost of the project).
As you can tell from the above, the impact of the Section 179D assignment depends on the relationship between the size of the building, total amount of project, and the portion of the project that is Section 179D eligible.
The key takeaway here is that you have an awareness of the value of the Section 179D assignment and whether it should be considered when bidding a project.
One last point: don’t let these details make your head spin. The goal of this article is to raise awareness, not to make you an expert. We aren’t tax experts either. But we do know how to help you incorporate tax benefits into your every-day selling process to win more projects
Topic for a future article: there was a change in tax law from the CARES Act which allows a wide array of interior building improvements (beyond just HVAC, lighting, and the building envelope) to be written off 100% in Year 1. This will make quite an impact on project economics in the C&I market.
Also, we can direct you or your customers to a nationwide firm who specializes in tax benefits for building owners.
I hope you find this article helpful. I encourage questions and/or comments of any type which might add to the understanding of readers.
Questions? I can be reached at 713.714.0575 or at firstname.lastname@example.org.
This article was written to summarize how ESCO’s and design-build contractors can benefit from Section 179D to win efficiency projects in the public sector. It covers just the basics and is purposefully narrow in scope. The contents of this article should not be interpreted as tax advice from EnFlux Building Solutions and readers should rely on tax counsel for advice. Also, EnFlux Building Solutions is not a partner to, or acting as an agent of Engineered Tax Services.