Section 179D Tax Deduction

The Section 179D Tax Deduction

Section 179D Tax Deductions apply 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 before 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 reduction percentage up to $5.00 per square foot.
  • Requires using prevailing wage. The only caveat is the meaning of prevailing wage has yet to be defined.
An Example

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 Don't Pay the 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.

Further, what is meant by "Prevailing Wage has not yet been defined. It could be union wages. Then again, if that's the case, what's the point of having unions? Plus that could kill jobs. It's more likely prevailing wage will be defined as the "going rate for the area.

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 Alternate Method

A new retrofit program is an election for a new alternative deduction for energy-efficient building retrofit, 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 according to the plan.

Special Rule for “Designers”

Previously, only public agencies were allowed to allocate the 179D Deduction. The Inflation Reduction Act allows all tax-exempt entities, including charitable organizations, religious institutions, private schools or colleges, private hospitals, museums, tribal governments, and other organizations under IRC 501(c).

Before 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, public and tax-exempt organizations could 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 building science, ESG, and tax codes but doesn't profit from their recommended upgrades. Whoever you hire, if they are also profiting from the upgrades, they're recommending, that's a financial conflict of interest.