Building owners and contractors who help reduce energy and power costs in government-owned buildings can apply for a Section 179D tax credit. Let us teach you how to claim your deduction, and how to receive maximum credit for installing new interior lighting systems, or heating and cooling systems with energy efficiency.
What is Section 179D?
Also known as the Energy Efficient Commercial Buildings Deduction, Section 179D in the Internal Revenue Code (IRC) is an engineering-based tax incentive that applies to new construction and retrofitting of existing buildings.
Qualified properties can get a tax deduction of up $1.80 per square foot for the installation of renewable energy and energy-efficient systems in commercial buildings and multi-family dwellings with four or more stories.
The energy-efficient improvements must also meet ASHRAE Standard 90.1 and be made on a building located in the United States. A noticeable reduction in Lighting Power Density (LPD), along with energy savings in building envelope, HVAC, and hot water systems can provide higher tax deductions.
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After the Consolidated Appropriations Act of 2021 was passed, the Section 179d tax incentive for energy-efficient buildings became a permanent part of the Internal Revenue Code. Prior to that, the IRS 179d deduction was originally enacted in the Energy Policy Act (EPACT) way back in 2005, and IRC Sec 179d was then extended and amended several times.
Another addition to Bill 133 (Consolidated Appropriations Act), was the inclusion of inflation in the IRS 179d tax credit. This amendment ensures that $the 1.80 credit in square footage will increase by an applicable percentage as inflation rises in the years to come.
Eligibility for the Section 179D tax deduction is divided into two categories. The first is for building owners, and tenants, while the second is for those who helped improve the energy efficiency of government buildings.
- Commercial building owners or tenants who help pay for construction expenditures
- Architects, engineers, designers, builders, or contractors who work on government-owned buildings.
As long as you fit into one of the two categories above, your eligibility will then depends on the type of property, and the amount of energy savings you produce.
Outside of government buildings, only properties that are designated commercial buildings built on U.S. soil can qualify for a Section 179D tax credit. The building itself can be newly constructed or an existing building that has been upgraded or retrofitted with energy-efficient systems.
As long as a building is primarily used for commercial or industrial purposes it can qualify for a 179D deduction. Some qualifying examples include:
- Office buildings and shopping malls
- Warehouses and unconditioned parking garages
- Buildings converted from other uses into a commercial building
Buildings with tenants, such as dormitories or multi-family dwells can also qualify as long as they are at least four stories tall.
Unfortunately, there are some exceptions to the rule where a few specific building types are ineligible to apply for an IRS 179D tax credit. The disqualified properties include:
- Buildings that do not use electricity or fossil fuels
- Religious buildings, since they are already tax exempt
- Manufactured houses or single-family homes
- Multi-family homes with three or fewer stories
Do note that when residential buildings do not qualify for 179d tax deductions, they can qualify for a 45L Energy Efficient Home Credit.
In 2008, the IRS 179D tax incentive was amended to include the company or person primarily responsible for creating energy-efficient systems in government buildings. This provision allowed them to transfer the deduction for energy efficiency to the parties who designed and implemented them via an allocation letter.
Some examples of government-owned buildings would include public libraries, universities, or government-run offices.
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ASHRAE Standard 90.1
To claim a tax credit for energy-efficient improvements to lighting systems, hot water systems, or heating and cooling systems you’ll need to understand what ASHRAE 90.1 is. This is a standard benchmark for U.S. commercial building energy codes. It can also be used to compare the energy consumption costs in your qualifying property to those of their baseline building.
For older commercial buildings, qualified computer software can also be used to calculate power consumption baselines. This software creates a computer-generated model of your building, based on how it would have been built in the past.
Once your virtual reference building is ready, the software then determines its energy cost of it and compares it to the current building cost. Should the software determine that your building has a 50% energy saving over the computer-generated version, then you can qualify for the full $1.80 per square foot deduction. If the savings are less, you can only qualify for up to $0.60/sq. ft via a partial deduction.
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Outside of the 179D tax deduction, your business may qualify for other tax incentives too.
- If you paid W2 employees through the COVID-19 pandemic, you’re very likely to qualify for Employee Retention Credit, even if you were the recipient of a PPP loan.
- If your business began operations after February 15, 2020, and you paid W2 employees between June 1st and December 31, 2021, you can also qualify for the Recovery Startup Business tax credit.
- If your company is involved and research and development, then you may also qualify for an R&D Tax Credit.