Energy Efficient Commercial Buildings Tax Deduction (179D)
The Energy Efficient Commercial Buildings Tax Deduction (179D), first introduced under the Energy Policy Act of 2005, offers tax incentives for commercial building owners, lessees, and government building designers who implement energy-efficient systems. The tax deduction applies to improvements to interior lighting, HVAC systems, and the building envelope, with the goal of reducing a building’s overall energy consumption.
Overview of 179D Tax Deduction
The Inflation Reduction Act of 2022 expanded the 179D tax deduction to include existing commercial buildings that reduce energy use intensity (EUI) by 25% to 50% from their pre-retrofit baseline, allowing them to qualify for the tax deduction. For the purposes of the deduction, a commercial building is defined as any building that can be modeled using ASHRAE 90.1 methodology which therefore includes residential buildings that are four or more stories. The broadening of the scope of the deduction from a focus on new construction projects to existing buildings using an EUI reduction approach, expands access to the program as more buildings can claim deductions based on actual energy savings. As of 2023, 179D offers deduction amounts ranging from $0.50 to $5.00 per square foot for full energy reduction amounts (see table below for deduction levels) and includes new rules regarding labor. Under the IRA, the 179D deduction is available every three years for commercial buildings (four years for buildings owned by tax-exempt entities), provided the new construction work meets eligibility requirements. The expanded deduction values provided in the IRA expire at the end of 2032.
Who is Eligible
Beginning January 1, 2023, the deduction became available to owners of eligible commercial buildings and designers of energy-efficient equipment. To qualify, buildings must be in the U.S. and originally placed in service for at least five years before a qualified retrofit plan is established. The energy efficient upgrades must be part of a certified plan to reduce total annual energy and power costs by at least 25%, compared to a reference building that meets ASHRAE 90.1 standards. The Internal Revenue Service Notice 2006-52 provides detailed instructions for claiming the deduction.
Amount of Deductions for 2023 and Forward
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The deduction for energy efficient equipment is the lesser of either the cost of the installed property or calculated according to the overall savings reductions. Since 2023, if local prevailing wages are paid and apprenticeship requirements are met, the maximum amount is five times the incentive for the energy savings alone.
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