It can be challenging for nonprofit leaders to keep track of the wide-ranging government support and tax benefits available to their organizations. That’s been particularly true in recent years, as many major pieces of legislation have been introduced – many of which have significant benefits for nonprofit organizations.
One change that’s gone under the radar is the revamped Section 179D deduction: a tax deduction that incentivizes energy-efficient construction projects. Until recently, these deductions were only useful to for-profit organizations and were less significant than they are under today’s new legislation.
The revamped Section 179D deduction expands eligibility for this credit to nonprofit organizations. If your nonprofit is in the midst of a major construction project or is planning enhancements or renovations in the near future, this deduction may offer major financial benefits.
Section 179D of the Internal Revenue Code was originally enacted as a temporary tax deduction in 2005 and was made permanent in 2020. In a nutshell, 179D provides a deduction to incentivize organizations to invest in energy-efficient projects. The deduction applies both to new construction projects and renovations of existing buildings that upgrade building energy efficiency, for example new windows or a new HVAC system. Historically, 179D has only applied to for-profit entities and government owned buildings and has been generally taken by commercial building owners and developers.
The Inflation Reduction Act, passed in August 2022, expanded Section 179D eligibility by granting tax-exempt organizations the ability to allocate these tax deductions to their construction partners, such as architecture, design, and engineering firms. Tax-exempt organizations can now use this deduction as a negotiation tool, offering to allocate the deduction to a contractor in exchange for a reduced bid or a contribution to the nonprofit.
The legislation also increased the deduction from a maximum of $1.88 per square foot to a maximum of $5.00 per square foot. The level of deduction an organization can receive operates on a sliding scale and is determined by the level of energy efficiency standards the project meets. The deduction is available for property placed in service after December 31, 2022.
To claim the deduction, Smith + Howard can introduce nonprofits to a specialized Section 179D firm, who will help organizations negotiate and facilitate transfer of the deduction. These firms receive a percentage of any approved tax deduction, meaning there is no financial risk for nonprofits in pursuing this opportunity.
Consider the hypothetical example of an independent school that wishes to build a new gymnasium.
Through a capital campaign, the school has raised the funds to construct a modern 25,000 SF gymnasium. It plans to construct the gym in accordance with the most advanced energy efficiency standards.
The school engages a specialized Section 179D tax deduction firm to pursue the deduction. The tax firm calculates that the school stands to receive a tax deduction of $125,000 (25,000 sq. ft. x $5/sq. ft. max deduction), which can be allocated to a contractor on the project. The tax firm then reaches out to all qualified vendors and negotiates concessions from a vendor in exchange for the tax credit.
The architect for the new gymnasium offers to make a $30,000 contribution to the independent school, while also waiving some of their fees associated with the project. Once construction is complete and the school allocates the tax deduction via Form 7205, the architecture firm receives the $125,000 tax deduction, which it uses to offset its federal tax liability. The provider receives a percentage of the overall tax deduction, essentially working on a commission basis.
It’s important for nonprofit organizations to understand the opportunities that new legislation and government programs might provide them. But among the day-to-day demands of managing an organization, that can be a difficult undertaking.
The support of an experienced nonprofit accounting firm is indispensable in allowing organizations to capitalize on new opportunities. At Smith + Howard, that’s exactly what we provide. Our specialized nonprofit accountants work with a diverse range of tax-exempt organizations across the country.
Our team goes to extensive lengths to understand how changing regulations might impact our clients and serves as a long-term, trusted advisor to many nonprofit leaders. To learn more about Smith + Howard’s services for nonprofits, or to explore tax opportunities available to your nonprofit, contact an advisor today.
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