179D Tax Deduction
What is 179D?
The Energy Policy Act of 2005 created a tax deduction for energy efficient buildings found in Section 179D of the Federal Tax Code. Section 179D provides a tax deduction for energy efficiency improvements to commercial buildings. A building may qualify for a tax deduction under Section 179D for as much as $5.00 per square foot. An energy efficient envelope, heating, ventilating, and air conditioning (HVAC) system, or lighting system can qualify for the 179D tax deduction. Energy simulations are required to show compliance with the energy and power cost savings requirements.
Who can claim the 179D deduction?
There are two groups of candidates eligible to claim the 179D tax deduction:
- Architects, engineers, ESCOs, and designers of energy efficient municipal building projects
- Private owners of energy efficient commercial properties
Qualified Individual
A qualified individual is required to perform a modeling analysis on the building, conduct a site visit, and provide a certificate of compliance to the tax payer. According to the IRS, a qualified individual is (1) not related to the taxpayer (within the meaning of Section 45(e)(4), (2) is an engineer or contractor that is properly licensed as a professional engineer or contractor, and (3) has represented in writing to the taxpayer that he has the requisite qualifications. In other words, an independent third party who meets the above criteria is required to perform the study.
Deduction Amount
The 179D deduction is calculated based on the energy efficiency of the commercial building, as compared to an ASHRAE 90.1-2007 baseline building. This baseline will be in place through tax year 2026. For new buildings and renovations placed into service in tax year 2023 and beyond, there is only one viable compliance pathway to qualify for 179D and that is via a whole building energy model.
Beginning in 2023, the 179D deduction ranges from $0.50/sf to $1.00/sf. The amount of the deduction is directly related to the energy savings predicted in the energy model analysis. This is a sliding scale from 25% energy savings to 50% energy savings correlating to the $0.50/sf minimum and $1.00/sf maximum. However, if the project meets the prevailing wage and apprenticeship requirements outlined in the Inflation Reduction Act or construction can be shown to have begun prior to January 29, 2003, then there is a 5x multiplier increasing the deduction range to $2.50/sf minimum and $5.00/sf maximum.
179D Tax Deductions as of March, 2024
For tax years 2022 and earlier, there are three compliance pathways to qualify for the 179D federal tax deduction:
- Whole building qualification with 50% energy and power cost savings shown through energy modeling.
- Partial qualification for envelope, HVAC, and lighting with energy and power cost savings shown through energy modeling with threshold options (see chart below).
- Partial qualification for lighting through the interim lighting rule based on reductions in installed lighting power.
* Savings refer to the reduction in the energy and power costs of the combined energy for the interior lighting, HVAC, and HW systems as compared to a reference building that meets the minimum requirements of ASHRAE Standard 90.1-2001 for buildings placed in service prior to 1/1/2016 and ASHRAE Standard 90.1-2007 for buildings placed in service on or after 1/1/2016.
* The tax deduction is prorated depending on the reduction in LPD. See IRS Notice 2006-52 for the definition of "applicable percentage."
Benefit
Ideal candidates for EPAct deductions are newly constructed buildings and renovation projects with at least 30,000 square feet. The following chart shows some examples of the 179D deduction amount you might expect to receive based on building size.
Reference Standard
The Secretary affirms ASHRAE Reference Standard 90.1-2019 for calculating energy and power consumption for building systems, with the following key points:
- For properties beginning construction after December 31, 2022, and placed in service after December 31, 2026, ASHRAE 90.1-2019 will be the applicable standard.
- Properties already under construction by December 31, 2022, or placed in service by December 31, 2026, will continue to use the older ASHRAE Reference Standard 90.1-2007.
| Date Placed In Service | Applicable Reference Standard |
|---|---|
| Before 1/1/2015 | 90.1-2001 |
| After 12/31/2014 and before 1/1/2027* | 90.1-2007 |
| After 12/31/2026* | 90.1-2019 |
* Taxpayers who begin construction before 1/1/2023 may apply Reference Standard 90.1-2007 regardless of when the building is placed in service.
For more information, please refer to https://www.irs.gov/pub/irs-drop/a-23-01.pdf.
179D Inflation Adjustments
To assist in planning for tax years 2023 and 2024, the inflation adjustment amounts for Section 179D are outlined below, based on Revenue Procedures 2022-38 and 2023-34. The chart lists the deduction amounts per square foot, which represent the limits of the available Section 179D incentives. These incentives correspond to 25% energy savings at the lower end and 50% energy savings at the higher end. Additionally, whether the prevailing wage and apprenticeship (PWA) requirements are met or if the taxpayer qualifies for an exemption will also influence the potential savings.
| PWA REGULATIONS | ||
|---|---|---|
| MET OR EXEMPT | NOT MET | |
| Deductions per Square Foot | ||
| 2023 TAX YEAR | $2.68-$5.36 | $0.54-$1.07 |
| Additional $0.11 for each percentage point greater than 25% energy savings, capping at 50% energy savings | Additional $0.02 per square foot for each percentage point greater than 25% energy savings, capping at 50% energy savings | |
| 2023 TAX YEAR | $2.83-$5.65 | $0.57-$1.13 |
| Additional $0.11 per square foot for each percentage point greater than 25% energy savings, capping at 50% energy savings | Additional $0.02 per square foot for each percentage point greater than 25% energy savings, capping at 50% energy savings | |
Taxpayers can benefit from recent adjustments to the Section 179D benefit, which is 7% higher in the tax year 2023 compared to the nominal amounts set by the Inflation Reduction Act. This increase will incentivize energy efficiency efforts and make it more feasible for various projects to pursue a Section 179D study. Additionally, projects that are placed in service during 2023 and 2024 will also receive these inflation adjustment boosts, and they will not need to comply with the PWA requirements due to this construction exemption.
How is the 179D tax deduction obtained?
To claim the 179D deduction, energy savings must be certified by an unrelated “qualified individual” who is a contractor or professional engineer licensed in the same jurisdiction as the building. A site visit of the property and energy modeling are required using software approved by the Department of Energy.
- Step 1: Preparation The team works to aggregate all documentation for a building (blueprints, plans, and specifications). After reviewing the documents, they schedule a site visit with the plant manager.
- Step 2: Site Visit The goal of the site visit is to understand how the building operates as a system—specifically, the mechanicals, heat and air conditioning, hot water, ventilation, interior lighting, and building envelope. The team works to document each facet of the building so they can pass the data to our energy modelers.
- Step 3: Energy Modeling Our energy modelers use AutoCAD and Department of Energy and IRS-approved software to compare the building model to a reference model and determine if the building has 25% or greater energy efficiency than the reference model (which is required to qualify for the deduction).
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Step 4: Certification
Our Professional Engineers provide a certificate of compliance. The certificate of compliance is then attached to Form 3115 and submitted to the IRS, where an adjustment is made to reflect the deduction.
A report is provided to the owner for backup documentation for the year they claim the tax deduction, which will detail the following information:
- Property overview
- Summary of allowable deduction
- Summary of energy efficient systems installed
- Energy model inputs
- Energy model results
- Energy cost savings calculations
- Field inspection summary
- Certificate of Compliance
- Allocation Letter (for non-profit, governmental agencies, etc. if applicable)
HOW DO I GET STARTED?
InversEnergy has been providing 179D tax deduction services for more than a decade. Due to the latest changes in the tax code and the extension of this deduction, many projects that were not economically feasible before are now more attractive to pursue. In addition to long-term energy cost savings from energy efficiency measures, the value of qualifying projects in 179D cannot be overstated.
InversEnergy's in-house energy modelers, commissioning agents, and professional engineers are available to assist you in securing your 179D tax deduction seamlessly. Get in touch to discuss your project.