Section 179D Tax Deductions
The Section 179D Tax Deduction
Section 179D Tax Deductions applies to energy efficiency improvements to a commercial building.
Inflation Reduction Act Updates
Here's What Changed
Applies property placed in service Jan. 1, 2023:
- The minimum required savings in total annual energy and power cost was reduced from 50% reduction to 25% reduction.
- The energy and power costs are now compared to the ASHRAE Standard 90.1
- The standard is what was in effect four years prior to the in-service date of the building.
- If the building achieves a 25% reduction in energy and power costs, the deduction is $2.50 per square foot.
- If energy and power costs are reduced further, the deduction increases by $0.10 for each additional percentage of reduction up to $5.00 per square foot.
When the energy and power costs of a new or retrofitted building are reduced by 35%, 10% more than the required 25%, while meeting prevailing wage and apprenticeship requirements, the 179D Deduction would be $3.50 per square foot.
You Dont Pay Prevailing Wage
If prevailing wage and apprenticeship requirements are not met, the deduction is $0.50 per square foot for a 25% reduction. Further reductions increase the deduction by only $0.02 per square foot, up to $1.00 per square foot
In the May 2022 revision of the IRS Practice Unit regarding 179D audits, Standard 90.1-2007 remains in effect until the Treasury has affirmed a new version of Reference Standard 90.1.
Here's What Gone
- The Act removed the existing rules for partial certifications (currently $0.60 per square foot for each lighting, HVAC and building envelope).
- Now you will want to plan your renovations. No more just doing the lighting and nothing else.
An Alternative Method
There is a new retrofit program, that is as an election for a new alternative deduction for energy efficient building retrofit, which is taken in the qualifying final certification year.
The alternative deduction requires a qualified retrofit plan and looks to reduce energy use intensity rather than total annual energy and power costs. The alternative deduction cannot exceed the aggregate adjusted basis of retrofit property placed in service pursuant to the plan
Special Rule for “Designers”
Previously, only public agencies were allowed to allocate the 179D Deduction. Now all tax-exempt entities can, including charitable organizations, religious institutions, private schools or colleges, private hospitals, museums, tribal governments, and any other organization falling under IRC 501(c).
Prior to 2023, a public agency could assign the 179D deduction to the designer of a government-owned agency. A designer is typically an architect, engineer or contractor that performs design-build services.
Thus, a public college could assign the 179D deduction, but a private college could not. Under the new Act, both public and tax-exempt organizations would be able to allocate the 179D Deduction to their designers.
You May Also Qualify For §45L Tax Credits?
You may also qualify for tax credits using Section 45L Tax Credits if you have multifamily property.
Here's What To Do Now
The best bet will be to engage someone who understands the bhilding science, ESG, and the tax code, who doesn't profit from the upgrades. If who you hire is also profiting from the upgrades they're recommending, that's a financial comnflict of interest.
Here's 179D Tax Deduction Pre-Inflation Reduction Act
Find out what is available pre-Inflation Reduction Act.