Will an IRS audit occur if I claim Section 179D deductions?
It is crucial for designers to carefully review those guidelines because on May 26, 2022, the Section 179D IRS Practice Unit published a knowledge-based document known as the ATG that details the procedures the IRS would follow when auditing Section 179D studies
Although the IRS won’t automatically conduct an audit if you claim the deduction as a designer of government-owned buildings, it’s important to take the right steps to confirm your eligibility. Section 179D is one of the so-called “practice units” that the IRS Large Business and International division (LB&I) has listed, and it offers a framework for designers who might be qualified to claim the deduction.
Why do you need a study to use a 179D deduction?
The Section 179D deduction is claimed by the business during the same tax year that the building is put into use. The deduction can be reported on the entity’s current-year tax return if it complies with the Section 179D study’s requirements. There are ways to claim the deduction retroactively if it wasn’t used on a timely filed tax return. For the purpose of claiming the deduction on amended tax returns, designers may go back three open tax years. Through a change in accounting method, building owners can go back and apply Section 179D results to the 2006 tax year.
For projects starting in 2022, the deduction can now be up to $1.88 per square foot after accounting for inflation. A business would claim the credit at $.63 per square foot if it was only deducting for one system, like the HVAC system.
A qualified third party, independent of the designer who is deducting Section 179D costs, models the building’s and improvements’ energy efficiency in a Section 179D study using energy modeling software that has been approved by the IRS.
The performance of the building is then compared to that of a reference structure that satisfies pertinent energy and power cost standards as determined by the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE). Additionally, the outside party visits the facility physically.
A licensed professional engineer (PE) or contractor in the state where the building is located must be the qualified third party. The third party must examine the energy model’s findings and confirm using ASHRAE standards that the improvements meet the necessary thresholds for energy savings.
Additionally, they must certify in writing that they have reviewed the energy model and agree with the allocation of the Section 179D deduction to the appropriate designer.
For businesses in the architecture, engineering, and construction industries, the Section 179D deduction can offer a significant cash-flow opportunity. To make sure they are maximizing the energy efficient deduction, businesses pursuing the 179D deduction should speak with SK Tax Associates.