179D and R&D Tax Credits

Posted on by cguske

The One Big Beautiful Bill Act of 2025 established a June 30, 2026, beginning-of-construction deadline for eligibility under Section 179D. This deadline was not the result of identified policy deficiencies, program misuse, or effectiveness concerns. Section 179D has operated as intended and continues to reflect long-standing bipartisan support for incentivizing energy-efficient building design. Despite that successful impact, the program is now in danger and the proposed sunset is nigh. If you stand to be negatively impacted by this you should inform your congressional representatives in DC of your concerns and ask that they “Retain Sec. 179D in the tax code beyond its June 30th beginning of construction deadline, support American energy dominance incentives, and enable America to accelerate to the forefront of technological development.” To contact the Virginia Congressional delegation (U.S. House and Senate), use the “Find Your Representative” tool at House.gov or Congress.gov and enter your zip code. Those of you with offices in multiple states should encourage your colleagues to solicit support from their congressional delegation. Additional information can be found in the issue brief prepared by AIA.

While our advocacy efforts at the federal level have borne fruit – firms can once again recognize R&D expenses all at once on their federal tax return – Virginia is looking to deconform several sections of the state tax code and that will impact claims for R&D expenses. This means that R&D expenses will need to be amortized over a five-year period in state tax returns. To be clear, the deductibility of R&D expenses is NOT in jeopardy; firms will still be able to claim R&D expenses in state returns and claim the entirety of their value. But those expenses will need to be amortized over a five-year period (rather than claimed all at once, as is now again allowable on the FED return).

This change results from the majority party’s attempt to further their policy priorities (affordable housing, expanded benefits) and mitigate the negative impact of federal policies (federal worker layoffs, costs associated with Medicaid) while avoiding tax increases. Requiring the expenses to be amortized is seen as a delay/deferment that maximizes cash flow without denying/disallowing the credits.

If you sense large forces at play, you are correct. Concerns have been voiced, but expectations should be sober. If you are impacted by these changes, you would do well to advocate for the 179D at the federal level and prepare to amortize the R&D at the state level.

AIA Overview of Senate-Approved Tax Bill

Posted on by cguske

The Senate approved the most sweeping tax rewrite in decades in early December by a vote of 51–49. The vote on the nearly 500-page bill was nearly along party lines — with only one Republican, Sen. Bob Corker (R-TN), voting against it. On the House side, a substantially different bill was approved on Nov. 16 by a vote of 227–205. The significant disparities between the two bills must be hashed out in conference before the final version can be sent to the President’s desk for signing. Check out a summary of the major the differences between the bills here Update – specific provisions H and S. Edit: As this article was being finalized, it looks as if the Senate and House negotiators have just come to a compromise.

Pass-through companies:
Some pass-throughs get a new deduction for reducing their tax burden. For partnership, S corporations, and sole proprietorships, the deduction would be limited to 50% of the taxpayer’s share of “W-2 wages” — those that are subject to withholding, elective deferrals, as well as deferred compensation. If a pass-through didn’t pay W-2 wages, it couldn’t use the deferral. The wage limit wouldn’t apply to taxpayers with income of $250,000 or less for individuals, or $500,000 or less for joint filers (indexed for inflation). The limit would phase in for taxpayers with incomes greater than those thresholds. The deduction would be limited for certain professional services — including those in architecture, health, law, engineering, and accounting. It would be fully available for services businesses with income of $250,00o or less for individuals or $500,000 or less for joint filers (indexed for inflation) and would phase out for incomes greater than those thresholds.

Lower taxes on pass-through business income:
Both the House and Senate bills lower taxes on the business portion of a filer’s pass-through income. The House bill dropped the top income tax rate to 25% (from 39.6%) while prohibiting anyone providing a professional service from taking advantage of the lower rate. It also phases in a lower rate of 9% for businesses that earn less than $75,000. The Senate bill lowers taxes on filers in pass-throughs by letting them deduct 23% of their income (up from 17.4 originally). The 23% deduction would be prohibited for anyone in a service business — except those with taxable incomes under $500,000 if married ($250,000 if single).

What does it all mean?
Most U.S. businesses are set up as pass-throughs (sole proprietorships, partnerships, LLCs, and S corps), rather than traditional corporations. Their profits are passed through to the owners, shareholders, and partners, who pay tax on them on their personal returns under ordinary income tax rates — rather than being filed on a separate business return like a corporation. Currently, pass through pay taxes topping out at 39.6% while corporations pay 35%.
Right now, architects are exempted from benefitting from the preferential tax rate. The relevant section of the Internal Revenue Code referenced in both bills is IRC 1202(e)(3)(A). It reads, “… the term ‘qualified trade or business’ means any trade or business other than—
(A) any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees …”

Here’s the status of a few other tax items that we’ve been following:

Historic Preservation Tax Credit
The federal Historic Tax Credit (HTC) was eliminated in the tax reform bill passed by the House, but the Senate approved a version that eliminates the 10% credit for rehabilitation of any structures built before 1936. The 20% credit for certified historic structures would be retained but spread over five years.

179(D) Energy Efficiency Tax Deduction
Neither of the bills includes a renewal of 179(D) which expired at the end of 2016. It is unlikely that Congress will choose to pass an extender package, meaning firms shouldn’t count on being able to utilize this tax benefit moving forward.

Work on 179D Continues

Posted on by cguske

AIA Virginia and our friends with ACEC Virginia have been working for years to address issues surrounding the Internal Revenue Code Section 179D, Energy-Efficient Commercial Buildings Tax Deduction.

Many of our firms realize significant tax savings in exchange for spending increased design time incorporating energy-efficient solutions into building designs and we’re working to preserve this benefit on multiple fronts.  Beyond our efforts to get 179D extended at the federal level, we’ve been working to curb a practice that firms are encountering in Virginia.

Some public bodies solicit payments or request fee reductions in exchange for signing the required allocation letter. The AIA and other stakeholders have consistently opposed this practice at the federal, state, and local levels. Last legislative session we worked to add language to the Virginia budget which would prevent a public entity from refusing to sign the allocation letter or make the signature contingent on any transfer of value from the designer to the public entity.

Though this effort failed in the end, we haven’t given up. We worked closely with AIA National, ACEC National, and ACEC Virginia to seek Senator Warner’s assistance and support in gaining more clarity surrounding congressional intent relative to section 179D of the IRC. We’re hoping for that guidance issued at the Federal level can be used to strengthen and complement our work at the state level to clarify legislative intent — and put a stop to public bodies asking for a reduced fee or “kickback” from the deduction.