By Sam A. Lazzara, CPA, Kevin Bass, CPA, and Kelsey Kaelin, CPA
Thanks to the recent changes brought about by the Inflation Reduction Act of 2022, the Section 179D Energy Efficient Tax Deduction is now accessible to nonprofit organizations as of 2023. This significant update enables nonprofits to reap the benefits of energy-efficient improvements to their facilities, a crucial step in advancing both their missions and financial sustainability. In this article, we will explore the intricacies of Section 179D, how it can be leveraged in tax preparation, and the essential steps involved in the allocation process, all while highlighting the broader implications for energy efficiency and environmental stewardship within the nonprofit sector.
What is Section 179D?
Section 179D of the Internal Revenue Code provides a tax deduction for energy-efficient improvements to commercial buildings they own, build, or renovate. This tax deduction is allowed if the building makes improvements in heating, lighting, HVAC, hot water, or the building envelope which includes roofs, walls, and windows that produce an efficiency of at least 25%.
How do Nonprofits Benefit?
These deductions work by passing the Section 179D deduction to a taxpaying entity through an “Allocation Letter.” These taxpaying entities will typically be the architect or engineer who claims the deduction. In return, the taxpaying entity will adjust the overall project costs for the nonprofit. Nonprofits planning construction or renovations should consider how integrating sustainable components can lead to savings. Energy-efficient facilities can support an organization’s mission and values while also lowering ongoing costs for water, heating, and electricity.
For projects meeting prevailing wage and apprenticeship standards, the qualified deduction ranges from $2.50 to $5 per square foot, depending on energy efficiency. For projects that do not meet these standards, the deduction ranges from $0.50 to $1 per square foot.
The Code Section 179D incentive can now be claimed on a specific commercial building every three years, whereas it was previously allowed only once over the life of the building.
What is an Allocation Letter?
As mentioned above, an Allocation Letter is used to transfer the 179D tax deduction to a taxpaying entity. There are a few steps in the Allocation Letter process. The steps are:
- Identify the taxpaying entity: The nonprofit entity must identify the entity to which the tax deduction is being transferred. This entity can be architects, engineers, designers, or contractors who contributed to the improvements and/or renovations to the building.
- Format the Allocation Letter: The letter must include:
- a. The name and address of the nonprofit organization.
- b. The name and address of the designer.
- c. A description of the energy-efficient improvements.
- d. The date the improvements were placed in service.
- e. A statement that the nonprofit is allocating the 179D deduction to the specific entity.
- Certification: The energy-efficient improvements must be certified by a qualified individual. This certification confirms that the improvements meet the energy efficiency standards required by Section 179D.
- Signatures: The letter must be signed by an authorized representative of the nonprofit, as well as the recipient of the tax deduction.
- Submission: The signed letter is then provided to the taxpaying entity, who can claim the deduction on their tax return.
What are the Key Benefits?
- Cost Savings: By passing the deductions to contributing entities, nonprofits can reduce the overall cost of the building project.
- Energy Efficiency: These energy-efficient improvements will have lasting impacts and will lead to long-term savings on utility bills.
- Alignments with Mission: Many nonprofits have missions that align with sustainability and positive environmental impacts.
Lastly, by leveraging this tax deduction, nonprofits can make their facilities more sustainable and cost-effective, aligning both financial and environmental goals. To get the most out of this deduction, be sure to plan ahead. When planning new construction or renovation, it is important to consider an energy-efficient design and to also seek out professionals who are familiar with this 179D deduction to maximize the cost savings on the project. During this process, it is also important to keep proper documentation of qualified expenses to support decisions made by the entities.
Maximizing the 179D Deduction for your Nonprofit
With over 40 years of experience, Rivero, Gordimer & Company proudly serves more than 150 nonprofits annually, offering expert financial services tailored to their unique needs. As the exclusive Tampa Bay member of Nonprofit CPAs, we deliver exceptional service to help organizations thrive. If your nonprofit is considering energy-efficient upgrades, we can guide you through the 179D deduction process to maximize savings and support sustainability. Contact a member of our Not-for-Profit committee for assistance.
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