Section 179D

How to Be more competitive bidding for government work

Did you know: If you’re a contractor involved in the construction of energy-efficient buildings for government agencies, you could qualify for a very significant tax break? This tax break could be leveraged to lower your bids for government work while driving more dollars to your firm’s bottom line. Here’s what you need to know.

Section 179D

To encourage the development or renovation of buildings that are energy efficient, Section 179D of the tax code provides a benefit for contractors (and others) that build or renovate green buildings. It’s a tax deduction that can let you write off as much as $1.80 per square foot of a project. That could add up to almost $55,000 for a 30,000 square foot structure.

What it takes to qualify

The standards to qualify for the deduction aren’t as challenging as many contractors expect.

  1. A building doesn’t need to have windflowers or grasses growing on the roof or a windmill powering its systems. In fact, all a structure is required to do is surpass the 2001 ASHRAE standards. Most current state codes, including those in Tennessee, do this. The bottom line is that most new construction and remodeling projects will completely or partially qualify for 179D simply by meeting current state building codes.
  2. The three subsystems that can fully or partially qualify for this incentive are the building envelope, the HVAC/hot water systems and the interior lighting systems. It is common that not all three systems will qualify, but you can earn a partial deduction if one or two of them do. To determine if a system does, you must have the energy savings certified using computer modeling and by a site visit from an independent licensed engineer. Getting this certification is not as difficult as it may seem. An accounting firm with experience in 179D deductions can guide you through the process.
  3. For contractors to earn the deduction, work must take place on government buildings for local, state and federal entities. This could include schools, university buildings, dormitories, airport terminals, jails, garages, warehouses, municipal buildings and more. Private sector and non-profit work does not make the cut.

How your firm can receive the deduction

Technically, the 179D deduction goes to the government agency that commissioned the project. The deduction does them no good because they don’t pay taxes. However, the government agency can allocate the 179D tax benefit to your contracting business if your firm was involved in some aspect of the building design. All you have to do is ask.

To transfer the benefit, the government agency is required to write a letter signed by a government official. It must include clear and specific information about the project and your firm’s involvement in it. A tax expert can explain what the letter must say or draft one that the government official agrees to sign.

It’s a good idea to make this request as early as possible since the government agency could transfer the deduction to any business that had a hand in designing the structure. Usually, the first one that asks for the deduction gets it.

TIP: You can include a request for the 179D deduction during the RFP or contract negotiation process. You may be able to leverage it to lower your bid while still earring higher profit on the job. It’s a great way to become more competitive while ensuring that your firm receives the deduction. An experienced accountant can help you structure a bid and contract request correctly.

If you run into any resistance from government officials, remind them that by assigning the deduction to your firm, they’re actively supporting green building practices in your community while making an investment in a local business that costs them nothing. If they’re smart, they’ll use this as a positive community relations opportunity.

Think you’ve missed out?

Have you done government work in the past that could have qualified for the 179D deduction? It may not be too late to claim it. You can receive this benefit retroactively for work your firm did within the last three years. Simply make a request for a 179D transfer letter to the government agency.

Next steps

If you already do contracting work with government agencies — or are interested in getting started or doing more of it — leveraging 179D can make your firm more competitive in the bidding process and drive more dollars to the bottom line of your business.

Taking a 179D deduction correctly isn’t easy, but it’s certainly worthwhile. A tax firm that has experience with the deduction can partner with you to ensure you enjoy the greatest possible benefit from it without exposing your firm to IRS scrutiny. Contact us today to find out how we can help.

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