Earlier today, the Senate Finance Committee approved the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act, which would resurrect roughly 50 expired tax incentive provisions that lapsed on December 31, 2013. Of particular interest to 501(c)(3) nonprofit organizations is the inclusion of a provision that will make it more cost-effective for some nonprofits to construct energy efficient buildings. Construction of health care facilities, academic buildings, and headquarters for other types of nonprofits are among the types of projects that will qualify for this new incentive if they meet certain energy efficiency standards.
Under existing law, Internal Revenue Code section 179D allows a taxpayer to deduct certain energy-efficient commercial building expenditures if the building meets standards for interior lighting, heating, cooling, ventilation, and hot water systems, among other things. The deduction is limited to a maximum of $1.80 per square foot of the property for which such expenditures are made. There are certification requirements and, since Congress enacted this deduction in 2005, the IRS has provided guidance on its implementation.
In 2008, Congress recognized that governmental building owners are unable to take advantage of a deduction since federal, state, and local governments do not pay taxes. In order to incentivize green building construction by public agencies, Congress permitted those agencies to allocate the value of the 179D deduction to the “person primarily responsible for designing the property” in lieu of the public entity. Construction firms, architects, and other designers could thus receive the value of the deduction and thus were incentivized to recommend green building technologies and designs to their public customers in addition to their commercial clients.
Clearly, however, a significant omission in the 2008 allocation authority legislation was the large number of nongovernmental nonprofit organizations that similarly are unable to utilize a tax deduction. As a result of this omission, a state university, for example, could avail itself of Section 179D allocation authority, but not a private college down the street.
Today’s Finance Committee Action
At the behest of Senator Ben Cardin (D-Maryland) and with support from other Senators on and off the Committee, the Senate Finance Committee included in today’s “extenders” bill a provision that both extends the Section 179D deduction for 2014 and 2015 and for the first time permits 501(c)(3) nonprofit organizations to allocate the deduction to the “person primarily responsible for designing the building.” As a result, nonprofits such as colleges, universities, hospitals, and other community organizations can work with their architects and construction firms to incorporate leading edge energy efficiency materials and technologies while knowing that there will likely be a federal tax deduction that helps pay for some of the up-front costs.
Stakeholders have advocated for the nonprofit expansion by arguing that the deduction will help drive ingenuity and design enhancements, encouraging innovation and lasting design improvements, all of which will contribute to lower operating costs for nonprofits. This, in turn, can help reduce upward pressure on college tuition and the cost of health care, among other societal benefits.
Today’s amendment also would increase the efficiency standards such that by 2015 qualifying buildings are determined relative to the 2007 standards of the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America (ASHRAE/IESNA). For 2014, the 2004 ASHRAE/IESNA standards will apply and next year, the higher 2007 standards will apply in determining if a construction project qualifies for the deduction.
Finance Committee Chairman Ron Wyden (D-OR) will want to have the full Senate consider the EXPIRE Act as soon as possible, since the business community in particular desires certainty on the more than 50 expired tax provisions. Today’s bipartisan support for the extenders legislation bodes well for full Senate consideration. Meanwhile, House Ways and Means Committee Chairman Dave Camp (R-MI) has announced that his committee will be reviewing the list of expired provisions in the coming weeks to decide which deserve to be made permanent and which are no longer necessary. He has indicated that some hearings on these issues are in store and has not set a timetable for a markup or floor consideration of an extenders package. Accordingly, it is unclear whether and when today’s legislative amendment regarding Section 179D will become law.