Expanding on the 179D commercial energy efficiency tax deduction available to commercial businesses within the U.S., personal tax benefits are available when dealing with a non-taxable entity. In other words, consultants and contractors can benefit personally while helping their non-taxed clients.
As I have written before, even if you have to file an extension, it may be worth it to receive these special tax deductions.
However, consider this information as opinion. Consult an accountant for specific tax-related advice.
Claim Your 179D Deduction
Basically, the special “energy efficiency tax deduction” 179D has been extended to tax-paying businesses for 2017. (Read more in “Special Tax Deductions Extended to Cover 2017 Tax Year.”) However, if a non-taxed entity (e.g., non-profit organization, government, etc.) did qualifying energy-efficiency upgrades, then the consultant, contractor or architect can fill in a form and claim the 179D deduction on behalf of the non-taxed entity.
There are some rules to follow, but if a consultant/contractor/architect was involved in a project, the non-taxable entity can assign the tax-benefits to the consultant. The consultant benefits from this tax deduction and can choose to pass on a portion of the savings to the non-taxed entity (as a benefit). This can be done as a discounted price, rebate, extra work/scope or many different ways.
The bottom line is that the nonprofit entity gets to receive some of the tax benefits, which otherwise would have gone unclaimed. Consultants or contractors should:
- Go back to your non-taxed clients that did qualifying energy efficiency projects in 2017.
- Let them know that although they can’t get the tax break, you can, and you can "pass on a portion to them" (you could split the cash value 50% if you like).
- Account for extra work or time to pay your accountant to process the paperwork (and you might have to explain the 179D deduction to them).
This process gets very exciting if you have multiple non-taxed entities because the tax deductions to you can really add up. If you’re able to achieve enough tax breaks where your taxable income goes to zero, then you don’t have to pay taxes for that year.
Maximize With Your IRA
Technically you can go further for even greater tax benefits, and the impact can be huge. (This idea can work anytime you have a “rough year” where your taxable income is less than zero.)
If you have enough pass-through tax deductions, it’s possible that you could actually have a negative taxable income. If that’s the case, then to offset the “losses” (which are just on paper) you could convert some of your tax-deferred IRA funds into ROTH IRA accounts.
This conversion would normally show up as “income,” but if you have a tax-deduction, it would cancel out and you still would owe zero taxes, while moving money into a “post-tax” account. So, the bottom line is you move money into the “safe zone” (tax free, not tax deferred) of a Roth.
An Example
The math works on any fraction of the numbers below or multiplication:
- Suppose you have a government or non-tax paying client that upgraded lights, building envelope and HVAC within a 1,000,000 square-foot building.
- The special energy efficiency deduction could be $1.8 million.
- This is worth about $600,000 at a 33% tax bracket.
- Split 50% the cash value and your client receives $300,000.
Sounds crazy right? Yet, I would borrow the money if I had to because your payoff is roughly twice that amount.
Because ‑ when your tax time comes ‑ you get to write off $1.8 million, which means the first $1.8 million of taxable income is now tax free to you. If you were in the top tax bracket, that is worth about $600,000 in taxes you don’t have to pay.
If you didn't profit $1.8 million last year, move money from your IRA to Roth IRA until your taxable income is zero, and you still come out ahead:
- Assume you made $1 million in taxable income last year and you get the $1.8 million tax deduction.
- You then have $800,000 worth of unused deduction, so you covert $800,000 of IRA funds into a Roth IRA account and your taxes are still zero, while protecting $800,000 from future taxes.
- Note that you could convert $825,000 to Roth because the extra $25,000 would put you at a taxable income that’s less than the first taxable bracket.
Unlike a “tax-deferred” plan, which will eventually tax you on the growth, Roth account funds won’t tax the growth of the account.
Any consultant, architect or contractor can do this. Make sure the energy efficiency projects happened and meet the qualifying criteria, then add up the square feet.
I hope that this information helps you and your clients be more successful and have positive feelings about doing more energy efficiency projects in the future. While we don’t know yet if 2018 projects will qualify for the 179D deduction, it has been enabled in 2015, 2016 and 2017, one could guess that it might happen in 2018, too.
Eric Woodroof is the Chairman of the Energy Management Professional Council and a member of two Hall of Fames.
