179D tax deduction: Here’s what it’s all about and what you might save, if you qualify
By Doug Sitton
If you’re a building owner, you may have heard about the benefits of the 179D tax deduction. But what does it mean for your building? And how can you qualify for it? This blog post will walk you through what you need to know about the 179D Commercial Buildings Energy-Efficient Tax Deduction.
What is the deduction?
The 179D tax deduction is offered to commercial building owners who meet certain criteria regarding their energy efficiency, including reductions in overall energy and power costs compared to a reference building. By installing qualifying systems, building owners can claim a tax deduction that can add up quickly.
Some energy-efficient systems that may qualify include:
- Interior lighting
- Building envelope
- Heating, cooling, and ventilation systems
- Hot water systems
The deduction is typically claimed by the building owner, but in some cases, it can be allocated to the primary designer, such as architects, engineers, or contractors, responsible for the energy efficient improvements. Check out the IRS Notice 2008-40 to learn more.
While 179D has been around since Jan. 1, 2006, it has only recently become a permanent program through the Consolidated Appropriations Act of 2021 and was expanded as part of the Inflation Reduction Act (IRA) of 2022. Deductions were revised as part of the IRA, beginning Jan. 1, 2023. .
How much can you save?
Buildings put into service in 2023 or beyond can receive a deduction of 50 cents per square foot, so long as they meet the baseline 25% energy savings to the reference building. Deductions increase by 2 cents per square foot—up to $1.00 per square foot—for each added percentage point of energy reduction.
But meet prevailing wage and apprenticeship requirements and you supercharge the deduction up to five times the savings per square foot. Deductions begin at $2.68 per square foot at the 25% energy savings baseline, and with each added percentage point of energy savings, you add 11 cents per square foot to a maximum of $5.36 per square foot.
The deduction cannot exceed the cost of the improvement, but there is no longer a lifetime cap for deductions on a building. It can be claimed every three years (four years for tax exempt entities) as long as you make the qualifying upgrades.
What if your systems were installed before 2023?
The deduction is capped at $1.80 per square foot, indexed for inflation after 2020. In most cases, the building must reach 50% energy savings.
These IRS notices offer more details:
Seek professional guidance
As you can see, there’s a lot to know about the 179D Commercial Buildings Energy-Efficiency Tax Deduction. Making the effort to understand the basics is time well spent, however, as the potential benefits can provide a significant tax deduction. To best determine if your building project might qualify for the 179D tax deduction, consider contacting your CPA or tax professional.
For more information, contact the author or read about 179D on the IRS website.