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 and 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.
Understanding Section 179D
Section 179D, an energy-efficient commercial buildings deduction, was created and implemented as part of the Energy Policy Act of 2005. It acknowledges 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:
Inflation Reduction Act
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:
The following types of buildings do not qualify for 179D:
If you’re unsure whether or not a building is eligible, we can help.
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).