Background
EngiTech Solutions, a mid-sized mechanical engineering firm based in Chicago, IL specializes in designing HVAC systems for educational institutions and nonprofit healthcare facilities. With a portfolio of over 100 projects completed in the past 5 years, EngiTech has established itself as a leader in energy-efficient building design. In 2024, the firm decided to explore the potential benefits of the Section 179D tax deduction for their completed projects.
For simplicity and privacy purposes, the names, locations have been anonymized and the deduction amounts have been rounded in the scenario below.
The Challenge
EngiTech faced several challenges in pursuing the 179D deduction:
- Identifying eligible projects within their portfolio
- Gathering necessary documentation for each project
- Conducting energy modeling and analysis
- Obtaining allocation letters from building owners
- Navigating the complex requirements of the 179D deduction
The Solution
EngiTech partnered with TaxSave Consultants, a firm specializing in energy tax incentives, to conduct a comprehensive 179D deduction study on their project portfolio. The study focused on projects completed between 2022 and 2024, since EngiTech could claim deductions for the past 3 tax years.
The Process
Step 1: Portfolio Review
TaxSave Consultants began by reviewing EngiTech's entire project portfolio, focusing on government-owned and tax-exempt buildings. They identified 37 potential projects that could qualify for the 179D deduction:
- 22 public school buildings
- 8 state university facilities
- 7 nonprofit hospitals
Step 2: Documentation Gathering
For each identified project, EngiTech collected and organized the following documentation:
- Building plans and specifications
- Energy models and simulations
- Construction completion dates
- Square footage information
- Project contracts and invoices
Step 3: Energy Modeling and Analysis
TaxSave Consultants used IRS-approved energy modeling software to analyze each building's energy performance. They compared the designed systems to the ASHRAE 90.1-2007 standard baseline, as required by the 179D regulations.
Step 4: Site Visits and Certification
Qualified engineers from TaxSave Consultants conducted site visits to verify the installation and performance of the energy-efficient systems. They prepared detailed reports and certifications for each qualifying project.
Step 5: Allocation Letters
EngiTech worked with TaxSave Consultants to obtain allocation letters from the government entities and nonprofit organizations that owned the buildings. These letters officially allocated the 179D deduction to EngiTech as the designer of the energy-efficient systems
Step 6: Deduction Calculation
Based on the energy modeling results and square footage of each building, TaxSave Consultants calculated the eligible deduction amount for each project. They considered both the base deduction rate and the potential bonus deduction rate for projects meeting prevailing wage and apprenticeship requirements.
Results
Eligible Projects
Out of the 37 potential projects identified:
- 31 projects qualified for the 179D deduction
- 6 projects did not meet the minimum 25% energy cost savings requirement
Energy Savings Achieved
The qualifying projects demonstrated impressive energy savings:
- 12 projects achieved 25-35% energy cost savings
- 14 projects achieved 36-49% energy cost savings
- 5 projects achieved 50% or higher energy cost savings
Deduction Amounts
EngiTech was able to claim substantial deductions:
Base Deduction Rate:
- Total square footage of qualifying projects: 2,800,000 sq. ft.
- Base deduction rate: $1.00 per sq. ft.
Total base deduction: $2,800,000
Bonus Deduction Rate:
- 18 projects met prevailing wage and apprenticeship requirements
- Total square footage of bonus-eligible projects: 1,950,000 sq. ft.
- Bonus deduction rate: $5.00 per sq. ft.
- Total bonus deduction: $9,750,000
Total 179D Deduction:
- Base deduction: $2,800,000
- Bonus deduction: $9,750,000
- Total deduction: $12,550,000
Tax Savings
Assuming a corporate tax rate of 21%, EngiTech's potential tax savings from the 179D deduction study amounted to approximately $2,635,500.
Project Highlights
Case 1: Lincoln High School Renovation
- Project type: Public school renovation
- Square footage: 150,000 sq. ft.
- Energy cost savings achieved: 42%
- Deduction rate: $5.00 per sq. ft. (met bonus requirements)
- Total deduction: $750,000
EngiTech's design for Lincoln High School's HVAC system upgrade incorporated high-efficiency heat pumps, energy recovery ventilators, and a building automation system. These improvements significantly reduced the school's energy consumption and operational costs.
Case 2: New Wing for Mercy General Hospital
- Project type: Nonprofit hospital expansion
- Square footage: 80,000 sq. ft.
- Energy cost savings achieved: 38%
- Deduction rate: $1.00 per sq. ft. (base rate)
- Total deduction: $80,000
For Mercy General Hospital's new wing, EngiTech designed a state-of-the-art HVAC system that balanced energy efficiency with the stringent requirements of healthcare facilities. The design included variable air volume systems, chilled beam technology, and advanced air filtration.
Case 3: State University Science Center
- Project type: State university new construction
- Square footage: 200,000 sq. ft.
- Energy cost savings achieved: 52%
- Deduction rate: $5.00 per sq. ft. (met bonus requirements)
- Total deduction: $1,000,000
EngiTech's design for the State University Science Center showcased cutting-edge energy-efficient technologies. The HVAC system incorporated geothermal heat pumps, radiant cooling, and a sophisticated laboratory ventilation system that significantly reduced energy consumption while maintaining strict environmental controls.
Challenges
Throughout the 179D deduction study, EngiTech and TaxSave Consultants encountered and overcame several challenges:
- Documentation gaps: Some older projects lacked complete documentation. The team worked closely with facility managers to reconstruct missing information and conduct additional site visits when necessary.
- Energy modeling complexities: Certain specialized facilities, such as laboratories and hospitals, required complex energy modeling. TaxSave Consultants employed advanced simulation techniques to accurately represent these unique building types.
- Allocation letter delays: Obtaining allocation letters from some government entities proved time-consuming. EngiTech's project managers personally reached out to their contacts to expedite the process.
- Prevailing wage verification: For projects potentially eligible for the bonus deduction rate, verifying compliance with prevailing wage requirements required additional research and documentation.
Lessons Learned
The 179D deduction study provided valuable insights for EngiTech:
- Early planning is crucial: Incorporating 179D considerations into the design process from the outset can maximize potential deductions and streamline documentation.
- Consistent documentation practices: Implementing standardized procedures for collecting and storing project information can significantly simplify future tax incentive claims.
- Client education: Informing clients about the 179D deduction can be a powerful marketing tool and may influence decision-making toward more energy-efficient designs.
- Importance of energy modeling: Accurate energy modeling not only supports 179D claims but also provides valuable data for improving future designs.
- Collaboration with tax experts: Partnering with specialists in energy tax incentives ensures compliance with complex regulations and maximizes deduction potential.
Long-term Impact
The success of the 179D deduction study has had several positive outcomes for EngiTech:
- Competitive advantage: The firm now highlights potential tax savings as a key benefit to clients, differentiating itself in the market.
- Increased focus on energy efficiency: The study reinforced the financial benefits of energy-efficient design, encouraging the firm to push for even greater energy savings in future projects.
- Improved cash flow: The tax savings from the 179D deduction allowed EngiTech to invest in new technologies and employee training.
- Enhanced reputation: The firm's success in achieving significant energy savings has bolstered its reputation as a leader in sustainable design.
- Ongoing tax strategy: EngiTech has implemented a process to evaluate 179D deduction potential for all new projects, ensuring continued tax benefits in the future.
Wrap up
The 179D deduction study proved to be highly valuable for EngiTech Solutions. By thoroughly analyzing their project portfolio and leveraging the expertise of tax specialists, the firm uncovered more than $12.5 million in tax deductions.
This case study demonstrates the significant financial benefits available to engineering firms that prioritize energy-efficient design in government and nonprofit buildings. Moreover, the process has positioned EngiTech for continued success by refining their approach to project documentation, energy modeling, and client communication.
As the 179D deduction is now a permanent part of the tax code, EngiTech is well-prepared to maximize this incentive for years to come, further solidifying its position as a leader in sustainable mechanical engineering design.