Secure the Section 179D Deduction for Energy Efficient Commercial Buildings
Section 179D is a tax incentive available for qualifying commercial buildings. As of 2022 due to the Inflation Reduction Act, The maximum deduction is increased from $1.80/sqft to $1.88/sqft in 2022 and starting in 2023, up to $5.00/sqft if all energy efficiency and prevailing wage requirements are met. This deduction is for energy efficient commercial and industrial buildings, as well as some residential buildings above four stories. The incentive is available not only for new construction projects, but for upgrades and retrofits of existing buildings too.
The Section 179D energy efficient tax deduction is typically taken by the building owner, but can be allocated to the designers, architects, engineers and contractors of public buildings in some instances. Starting in 2023 the allocation can be made from tax exempt entries to designers.
This portion of Section 179D was made permanent in 2021 as part of the Consolidated Appropriations Act, a COVID relief bill. Find out more about the incentive and how Tri-Merit can help you secure a claim.
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Understanding Section 179D
The Section 179D energy efficient commercial buildings deduction was created and implemented as part of the Energy Policy Act of 2005, in acknowledgment of the significant role commercial buildings play in U.S. energy consumption. In a bid to reduce energy consumption, the federal government wanted to encourage the design and construction of energy efficient buildings, providing an incentive in the form of a tax deduction.
Section 179D allows the building owner to deduct from the costs of energy efficient improvements in three areas:
- Building envelope
- HVAC and hot water systems
Inflation Reduction Act
- Raises the maximum deduction value from $1.88 per square foot to $5.00 for projects Placed in Service beginning 1/1/23.
- Adds prevailing wage and apprenticeship requirements to qualify for increased deduction amount.
- Eliminates the partial deduction and interim lighting rules.
- Reduces the threshold to qualify to 25% with credit increases as efficiency increases.
- Significant change: New Allocatable Properties Include:
- The deduction can now be taken on a specific commercial building every three years for privately owned, and every 4 years for government/tax-exempt owned
Section 179D Eligibility
Only commercial buildings built on U.S. soil can qualify for the Section 179D energy efficient tax deduction. The incentive is available for new construction projects as well as upgrades and retrofits of existing buildings.
The building must be within the scope of ASHRAE Standard 90.1-2001, which means that it is:
- Primarily used for commercial purposes
- Used for industrial purposes
- Dormitory building
- Converted from other uses to be a commercial building
- Unconditioned garage spaces
The following types of buildings do not qualify for 179D:
- Single-family homes
- Multi-family homes with three or fewer stories
- Manufactured houses
- Buildings that do not use electricity or fossil fuels
- Religious buildings (as they are already tax-exempt)
If you’re unsure whether or not a building is eligible, we can help.
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How much can be claimed under Section 179D?
The amount that can be claimed depends on the level of energy savings—the greater the energy savings, the greater the deduction up to the defined limits. The deduction cannot exceed the cost of the qualifying property.
There are three different ways to qualify—the maximum deduction, a partial deduction, or the interim lighting rule. While this makes the incentive more complicated, it also provides more opportunities for more building owners.
Qualifying for the Maximum 179D Deduction
Due to the Inflation Reduction Act of 2022, the maximum deduction is increased from $1.80/sqft to $1.88/sqft and starting in 2023, up to $5.00/sqft if all energy efficiency and prevailing wage requirements are met.
The deduction is now based on a sliding scale with $2.50/sqft being the minimum deduction with a 25% efficiency increase scaling to $5.00/sqft for a 50% efficiency increase (assuming prevailing wage requirements are met). To claim it, the building must meet or exceed a 50% savings in energy and power costs when compared to:
- a building meeting ASHRAE Standard 90.1-2001 (for buildings and systems placed in service before January 1, 2016), or
- a building meeting ASHRAE Standard 90.1-2007 (for buildings and systems placed in service after January 1, 2016)
Qualifying for a Partial Deduction
Even if a building doesn’t meet the overall 50% savings, it may qualify for a portion of the deduction:
- $0.60/SF for lighting systems meeting 25% savings
- $0.60/SF for building envelope systems meeting 10% savings
- $0.60/SF for HVAC and hot water systems meeting 15% savings
179D Interim Lighting Rule
It is also possible to partially qualify through the 179D interim lighting rule, which allows for a prorated deduction for a 25–40% reduction in lighting power density (50% for factories).
Who can complete a 179D claim? How does a 179D deduction claim work?
A taxpayer cannot prepare the claim on their own. A licensed engineer must complete a certification to validate the savings claimed on behalf of the owner.
To file a Section 179 claim, the IRS requires:
- Third-Party Inspection, Verification and Certification in accordance with Section 179D of the Internal Revenue Code
- Energy modeling w/ DOE approved software
- Allocation Letter (public buildings only)
It typically takes between 4–6 weeks to complete a Section 179D study. To ensure the best and most efficient outcome, it’s important to work with the right specialty tax partner. Choosing experienced professionals who specialize in engineering-based incentives will not only help prevent problems with claiming the 179D deduction, but will make the entire process smoother and considerably less stressful.
At Tri-Merit, we are highly experienced professionals in the field of engineering-based tax incentives, including Section 179D. We can help determine eligibility, perform the 179D tax study, and assist throughout the entire process.
Claiming the Section 179D Tax Deduction
Tri-Merit makes a complex process refreshingly simple.
- We gather data and provide a no-cost feasibility analysis.
- Should you qualify and want to proceed, we will follow IRS-prescribed analysis and modeling criteria to validate energy efficiency and potential tax savings. Upon completion, we provide the required third-party certification report.
With a dedicated team working on your behalf, the 179D energy efficient tax deduction can be completed quickly and stress-free.