Posted by Jeffrey Feingold on 06.21.23
The Energy-Efficient Commercial Buildings 179D Tax Deduction, is a tax incentive first introduced in 2005 as part of the Energy Policy Act. Section 179D provides taxpayers with an incentive to make commercial building property more energy efficient. The Sec. 179D deduction has been in effect since Jan. 1, 2006, and then was made permanent as part of the Consolidated Appropriations Act in 2021. Congress recently passed the Inflation Reduction Act (IRA) which included a number of significant changes to Section 179D seeking to drive massive reductions in energy costs of homes and buildings across the United States. The Inflation Reduction Act’s modifications and new provisions under 179D create additional tax savings opportunities for taxpayers that invest in energy-efficient building construction projects. The IRA will transform markets across the U.S. Especially in the construction industries with tax incentives and rebates for investments in better building codes as well as improvements to public buildings nationwide.
Who Can Qualify?
Commercial building owners and designers of public building projects that incorporate certain sustainable building components can qualify for the 179D tax deduction.
To qualify for the 179D deduction, the architect, engineer, contractor or designer, all of whom can go back three years to receive the benefit, must get a letter allocating the tax benefit from the government agency or tax exempt entity that owns the building. Additionally, all 179D projects require an independent certification, which includes modeling to verify the level of efficiency and a site inspections by licensed engineers.
Request a free assessment to determine if you qualify for energy-efficient tax deductions.
What are the Benefits of the 179D Tax Deduction?
Under Section 179D of EPAct, energy-efficient building owners and designers can have significant cost savings by qualifying for this tax deduction. Qualifying projects that occurred after December 31, 2005, are eligible for up to $1.88 per square foot; however, the Inflation Reduction Act increased that number to up to $5 per square foot for projects completed after January 1, 2023.
What makes it an Energy-efficient commercial building?
To be eligible, energy-efficient property must be installed on certain types of buildings, as described in 179D. These are largely commercial buildings and multifamily buildings that are at least four stories tall. Eligible property includes schools, churches, hospitals, and other property within the scope of Standard 90.1 published by the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) and the Illuminating Engineering Society of North America. The buildings must also be located in the United States. Eligible building systems include the building envelope, interior lighting systems and mechanical which includes heating, cooling, ventilation, and hot water systems.
Recent Improved Changes
The new structure for 179D provides a 90.1-based metric for new construction, calling for buildings to perform 25–50% better than 90.1, starting with 90.1-2007 and evolving every few years to the most recent standard authorized by the federal government, to ensure raising the standards over time. For reaching that achievement, buildings will be eligible for a sliding-scale deduction of $2.50 to 5.00 per square foot almost triple the current maximum deduction of $1.80 like previous.
That alone is a significant improvement to the tax code that should drive a lot of activity in the years ahead, but the law also adds another alternative structure for existing buildings to qualify for the same $2.50 to $5.00 per square foot deduction by bettering their current energy use intensity (EUI). The best part of these changes to the new framework, like many of the tax incentives in the Inflation Reduction Act which took effect in 2023 - it has no expiration or end date. It is now a permanent part of the tax code.
179D will also have a lower base deduction amount of $.50 per square foot but can go all the way up to $5.00 per square foot for full energy reduction amounts plus new labor rules.
New Deduction Amounts:
Building owners can claim 179D every three years with authorized upgrades. Starting in 2023, REITs and tax-exempt buildings can also take the deduction, further advancing its use and value.
Prevailing Wage and Apprenticeship Requirements
To meet the requirements for the full tax deduction now means accumulating prevailing wage and apprenticeship hours for all new construction projects. The new labor rules in some cases will apply to modifications or repairs as well. This requirement applies to all clean energy tax incentives in the IRA, including 179D, 45L, and several other production and investment tax credits.
General contractors and subcontractors must pay local prevailing wage rates to laborers and mechanics, and independent contractors from when construction begins to five years after the building is placed in service. The apprenticeship requirement comes into play if four or more people are on the job. The minimum apprenticeship hours gradually raise from ten percent in 2022 to 15 percent in 2024 and beyond.
There are few exclusions to the labor and apprenticeship rules, so contractors and owners may need to plan more carefully to claim the full deduction for an upcoming project.
One of the important items to note is that any projects commenced prior to 1/29/2023 will not be required to comply with the prevailing wage requirements for the “Increased deduction amount” of up to $5.00/SqFt.
TPA Offers a Free Assessment to Determine if You Qualify
Tax Point Advisors offers a more cost-effective and hands-on approach to 179D studies than many of our competitors:
Deducting your energy-efficient buildings can lead to significant cost savings. To learn more about the 179D tax deduction from the experts at Tax Point Advisors, simply fill out the form on this page and a member of our team will be in touch with you. Or, you may call us at (800) 260-4138 nationwide.
