Section 179D Energy Tax Deduction
On Dec. 27, 2020, the Consolidated Appropriations Act, 2021, H.R. 133, was signed into law which extended the 179D Tax deduction permanently. 179D is a section of the Internal Revenue Service tax code that allows a deduction of up to $1.80 per square foot for energy-efficient commercial building property. Section 179D has been around for several years but has been very underutilized by those who have constructed energy-efficient buildings.
How It Works
A 179D study requires a qualified third-party analysis. IRS-approved energy software is used to model the energy usage performance with a reference building, according to standards set by the ASHRAE. If the building meets the approved standard, then the deduction can be taken.
What Qualifies for Section 179D?
Energy-efficient construction or improvements that reduce the energy use of a building, specifically the lighting, building envelope, and mechanical systems. To qualify, the energy-efficient property must reduce the energy and power costs of a building located in the United States by 50% or more in comparison to the minimum requirements of ASHRAE Standard 90.1. If the 50% target savings is not met, the provision allows a partial deduction of $0.60 per square foot for each of the following components:
- Interior lighting systems meeting a 25% cost savings
- Heating, cooling, ventilation, and hot water systems meeting a 15% cost savings
- Building envelope meeting a 10% cost savings
- Commercial buildings, including warehouses and parking garages
- Multi-family properties with four stories or more
- Government-owned buildings, such as public universities, libraries, etc.
What Type of Items Are Needed for the Study?
Building plans and information on the lighting and mechanical systems.
How will Section 179D Affect My Tax Return?
The deduction will directly reduce taxable income. The deduction is taken as other deduction titled “other 179D.” Tax form 3115 allows taxpayers who placed qualified buildings in service in past years to take the deduction on current tax returns. This means buildings completed after 2005 could qualify.
Example: A business owner builds a new 25,000 SF warehouse that meets the qualifications to take the 179D deduction. Therefore, a tax deduction of $45,000 is taken on the tax return.
179D Commercial Buildings Tax Deduction
Also known as the 179D Energy Policy Act (EPAct) tax deduction, the Commercial Buildings Tax Deduction program incentivizes real estate investors and developers for installing energy efficient features in commercial new construction, energy rehab and renovation projects.
First established in 2006, this provision of the U.S. federal tax code was made permanent by the Consolidated Appropriations Act, 2021, H.R. 133, which was signed into law in December of 2020.
This deduction allows you to claim up to $1.80 per square foot of qualifying properties. With this incentive on the table, developers have a significant financial incentive for incorporating green building technologies into their projects.
How Does the 179D EPAct Tax Deduction Work?
Depending on the type of energy efficient features you include in your project, you could qualify for a tax deduction of up to $1.80 per square foot.
To qualify for the full deduction, the project must have HVAC equipment, a building envelope, and/or lighting that reduce the energy consumption and cost of the respective system to 50% or less than that of a comparable property without the energy efficiency features, based on ASHRAE Standard 90.1 minimum requirements.
You can take a partial deduction of $0.60 per square foot if the property meets all three of the following standards.
- A 15% reduction in energy use and cost for HVAC and hot water systems;
- A 10% reduction in energy use and cost for building envelope; and
- A 25% reduction in energy use and cost for lighting systems.
The Act also provides for a partial deduction option ($0.30 to $0.60 psf) for energy efficient interim lighting that reduces energy use and cost by 25% to 40%, or 50% for warehouse properties.
What Qualifies for a 179D Commercial Buildings Tax Deduction?
To qualify for this incentive, properties must be for commercial use (although multifamily projects of four-stories or above also qualify). Both warehouse and parking facilities do qualify under 179D. Projects must be located in the U.S. and meet the energy efficiency requirements outlines above.
You can take this deduction on new construction projects as well as those that have been retrofitted specifically for increased energy efficiency. Projects must have been
placed into service or undergone qualifying retrofit any time from January 1, 2006 forward.
Except for governmental entities, whoever has a cash basis in the property can claim the deduction. This includes tenants if the tenant made the expenditures.
Obtaining Certification & Applying for 179D EPAct Deductions
To apply for this tax incentive, you must complete and submit the required documentation and provide the required analysis and certification. Certification must be prepared by a licensed and qualified, non-affiliated party, specifically a licensed contractor or engineer from the area in which the building is located. The certification preparer must perform field inspections in accordance with National Renewable Energy Laboratory (“NREL”) guidelines and, using authorized software, calculate the energy and power cost savings.
Thanks to the current building standards and codes, many projects qualify for this lucrative tax deduction. To determine whether your project qualifies, contact Cost Segregation Authority today. We provide a no-cost, no-obligation benefits analysis, to determine whether you could be entitled to take advantage of the EPAct deductions.
Contact us now to learn more about how to qualify for a 179D commercial building tax deduction for energy efficiency.