Allocations of Sec. 179D Deductions by Government Building Owners

By Lisa Wamboldt, J.D., Jason Spitzer, J.D., and Scott McCandless, J.D., Washington, DC

In October 2009, President Obama issued an executive order setting sustainability goals for federal agencies in improving their environmental, energy, and economic performance. Agency targets include a 26% improvement in water efficiency by 2020 and 50% recycling and waste diversion by 2015, with 95% of all applicable contracts meeting sustainability requirements. This is an ambitious goal, given that the federal government occupies nearly 500,000 buildings and purchases more than $500 billion per year in goods and services.

Many of the improvements to government-owned and government-leased buildings will take the form of energy-efficient building improvements in lighting, heating, cooling, and insulation. In the context of a commercial building, such improvements likely would be eligible for Sec. 179D accelerated tax deductions. Notice 2008-40 provides that in the case of a government-owned building, the tax benefit of these deductions may be allocated by the government owner of the property to the designer or person who creates technical specifications for improvements that otherwise would be eligible for the Sec. 179D deduction.

Qualifying for the Sec. 179D Deduction

The Energy Policy Act of 2005, P.L. 109-58, enacted Sec. 179D, which is scheduled to expire after 2013. Sec. 179D allows a taxpayer to deduct fully in the current year the cost of energy-efficient commercial building property installed during the tax year, up to a cap. The deduction is available both for upgrading existing buildings and for building new structures, using new or used commercial property, if placed in service after 2005 and before 2014.

Energy-efficient commercial building property (qualified property) is property that is depreciable or amortizable, installed on or in any building located in the United States, and within the scope of standards established by the American Society of Heating, Refrigerating, and Air-Conditioning Engineers and the Illuminating Engineering Society of North America. The property must be related to interior lighting systems; heating, ventilation, and air conditioning systems; hot water systems; or the building envelope (e.g., insulation and windows).

The maximum deduction amount is $1.80 per square foot of building for qualified property that reduces by 50% or more annual energy costs compared with a reference building. A reference building is one that is located in the same climate zone as the taxpayer’s building and that is otherwise comparable to the taxpayer’s building. Even if limited by the 50% efficiency standard, a taxpayer still may qualify for a partial deduction under Sec. 179D(d)(1) and Notice 2006-52, which allows a taxpayer to deduct up to $0.60 per square foot of qualified property that reduces annual energy costs by less than 50% but by at least 16.67%.

Allocation of the Sec. 179D Deduction to Designers

Notice 2008-40 provides that in the case of qualified property that is installed on or in property owned by a “Federal, State or local government or a political subdivision thereof,” the government owner may allocate the Sec. 179D deduction to the person primarily responsible for designing the property (designer).

A designer is a person who creates the technical specifications for installing qualified property and may include an architect, engineer, contractor, environmental consultant, or energy services provider who creates the technical specification for a new building or an addition to an existing building that incorporates qualified property. A person who merely installs, repairs, or maintains the property is not a designer. The government owner of the building may either allocate the full deduction to a single designer or determine an allocation of the deduction among several designers, if each meets the definitions under Notice 2008-40.

Defining “Government Owned”

In order for a building owner to allocate the benefit of the Sec. 179D deduction to a designer, the owner must meet the definition of “government” (which includes a political subdivision) as set forth in both Sec. 179D(d)(4) and Section 3 of Notice 2008-40. There is no additional explanation of the phrase “political subdivision” in Sec. 179D (or elsewhere in the Code) or in Notice 2008-40. However, according to Regs. Sec. 1.103-1(b) (for purposes of the income exclusion for interest from government obligations), “political subdivision” denotes any division of any state or local government unit that is a municipal corporation or that has been delegated the right to exercise part of the sovereign power of the unit.


To meet the new emissions reduction targets under the executive order, federal agencies are likely to continue including more requirements in contracting protocols throughout the government’s supply chain. While these energy-efficiency targets create opportunities for designers under Sec. 179D, they can also create challenges for suppliers and others contracting with the government when determining who has the authority to allocate these tax benefits. The challenges and technical implications relative to these initiatives should be considered during contracting so that the appropriate level of analysis can be performed with respect to allocation of the Sec. 179D deduction.

Editor: Annette B. Smith, CPA


Annette Smith is a partner with PricewaterhouseCoopers LLP, Washington National Tax Services, in Washington, DC.

For additional information about these items, contact Ms. Smith at (202) 414-1048 or

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