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The IRS Issues New Administrative Authority Governing the I.R.C. § 179D deduction for Building Envelope Efficiency

Tuesday, August 9th, 2022

Admin-Veritax August 9, 2022

On May 26th of 2022, the Internal Revenue Service’s (the “Service” or the “Service’s”) Large Business and International Practice Unit (“LB&I”) released new administrative authority governing the I.R.C. § 179D deduction for building energy efficiency. As a background, the LB&I unit is responsible for tax administration activities for domestic and foreign businesses with a United States tax reporting requirement and assets equal to or exceeding $10 million, as well as the Global High Wealth and International Individual Compliance programs. The scope of this practice guidance is to serve as a blueprint for this area of the tax law under I.R.C. § 179D for the Service’s examiners (e.g., Revenue Agents, Field Agents, etc.) It is meant to provide guidelines for how to correctly conduct an official examination, with a focus on designers of government-owned buildings by creating more procedures to review during examinations of the I.R.C. §179D energy tax deduction.

Since the Energy Policy Act of 2005, government building owners can allocate I.R.C. §179D tax deductions to the designers of the building. Administrative authority pursuant to I.R.S. Notice 2008-40 has long defined an eligible designer as “a person that creates the technical specifications” for the energy-efficient property. Several examples defining the designer role could include “an architect, engineer, contractor, environmental consultant or energy services provider who creates the technical specifications for a new building or an addition to an existing building that incorporates energy-efficient commercial building property.” The Service’s practice unit emphasizes that examiners determine eligibility for the allocation of I.R.C. §179D deductions by reviewing actual contracts to properly ascertain a taxpayer’s responsibilities in designing energy-efficient green government buildings. The actual design responsibilities for a building are typically designated by the underlying contract. The new guidance dictates that the eligible designers should be able to present a design contract, the technical specifications, stamped or sealed drawings, or additional contemporaneous documentation establishing designer status with preliminary design reviews, critical design reviews, or other supporting documentation.

The Service’s new LB&I Practice Unit guidance can be referenced here.

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