179D Energy Efficient Building Deduction
Federal Tax Deduction Worth up to $5.81 Per Square Foot for the Reduction of Energy and Power Costs in Commercial Buildings.
Overview
Tax Incentive for Developers, Investors, and Designers of Energy Efficient Buildings
The 179D Federal Tax Deduction allows a tax deduction of up to $5.81 a square foot for energy-efficient building improvements and new building construction. This deduction is available to taxpayers who build new assets or make upgrades to their lighting, insulation, or HVAC systems. Owners can allocate the deduction to architects, engineers, and other government building designers.
Congress Made 179D Permanent
The Consolidated Appropriations Act of 2021, signed into law on Dec. 21, 2020, made the 179D Energy Efficient Building Deduction permanent. The expansion of the inflation reduction act of 2022 also added an annual inflation adjustment, allowing the up to $5.81 per square foot deduction to increase over time. This program was initially enacted as part of the 2005 Energy Policy Act (EPAct) to incentivize taxpayers to design and improve properties for energy efficiency.
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What types of Properties Qualify:
- Newly constructed commercial buildings (any size)
- Newly constructed apartments, four or more stories, for lease
- Commercial & residential rental energy renovations
- Public buildings
- Parking Garages
Qualification Requirements
- Energy-efficient property must reduce energy costs by at least 25% and up to 50% in comparison to the minimum requirements of the ASHRAE Standard
- The deduction cannot exceed the cost of the qualifying property.
- The depreciable basis of the property is reduced by the amount of the current deduction.
Benefits
- The deduction is increased on a sliding scale for each percentage point above 25% energy savings and is capped at 50% energy savings.
- Taxpayers that meet the optional prevailing wage requirements qualify for a higher deduction
See Examples
Calculating the benefit
If the construction or improvement meets the Prevailing Wage and Apprenticeship requirements, the base deduction amounts increase five-fold.
Building Size (in sf)Efficiency Increase Over BaselineDeduction Amount Without Prevailing WageUpfront Tax Savings (Deduction)75,000 sf25% – 50%$0.58 to $1.16 per square foot$43,500 to $87,00075,000 sf25% to 50%$2.90 to $5.81 per square foot$217,500 to $435,750
Earning the Maximum Deduction
Not all energy-efficient improvements qualify. It’s important to seek advice early as maximizing the 179D deduction is all about design. Additionally, there may be other incentives or strategies available to further enhance benefits for the same project, resulting in a greater ROI, and reduced payback period.
Earning the Maximum Deduction
- Taxpayers can take the 179D deduction for the placed-in-service year.
- There are different filing requirements to take the deduction in the tax years after the property is placed in service.
- Building owners and tenants may use Form 3115, Change in Accounting Method, to retroactively take the deduction in prior years
- Eligible designers or builders of government-owned buildings have to amend their tax returns to take the deduction. Hence, they can only file for open tax years, generally three years from the date of filing.
Get Started
Meridian’s team of engineers and tax professionals can develop and support your deduction by conducting a detailed engineering analysis, including energy simulation modelling or lighting power density calculations as required by the IRS.
Our studies include all certification and inspection documents required by the U.S. tax code.
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