Introduction
Walker Reid Strategies (WRS) recently partnered with an Energy Services Company (ESCO) to complete a Section 179D certification for a large church’s energy efficiency retrofit in 2024. The project focused on significant HVAC upgrades at the church campus in Alpharetta, GA, resulting in improved energy performance and comfort. Beyond the technical success, the project unlocked a substantial federal tax deduction (approximately $580,000) allocated to the ESCO as the designer of the energy-efficient improvements. This case demonstrates how leveraging §179D of the tax code, especially under the new provisions of the Inflation Reduction Act, can create win-win outcomes for tax-exempt organizations and their energy service partners.
Technical Scope: HVAC Upgrades and Energy Conservation Measures
The cornerstone of this project was a major HVAC system overhaul to boost the facility’s energy efficiency. Working closely with the church facilities team, the ESCO removed outdated cooling equipment and installed modern, high-efficiency units. Key upgrades included:
- Replacement of Chillers/Condensing Units: Removal of two aging Carrier 50-ton air-cooled condensing units and installation of two new Trane 50-ton condensing units. These new units offer improved reliability and higher efficiency, directly reducing the building’s cooling energy consumption.
- Evaporator Coil Replacement: The original Carrier evaporator coils in the existing air handling units (AHUs) were removed and swapped with third-party high-performance evaporator coils designed to fit the Carrier AHUs. This upgrade enhanced heat exchange efficiency without requiring full AHU replacements.
- Refrigerant Piping and Controls Integration: The refrigerant line connections were reworked and replaced as needed to accommodate the new condensing units and coils. Additionally, the control systems for the HVAC units were disconnected and reconnected to ensure the new equipment integrated seamlessly with the church’s building automation system. Temporary rigging and lifting equipment were used to safely remove the old units and install the new ones on the roof.
These HVAC improvements significantly lowered the facility’s heating and cooling energy usage. In fact, energy modeling of the upgraded church building showed over a 50% reduction in annual HVAC energy costs compared to the baseline, far exceeding the 25% savings threshold required for §179D qualification. Such substantial energy savings not only improve the church’s operational efficiency but also qualified the project for the maximum available tax deduction per square foot under the 179D program. A certified third-party engineering analysis (performed by WRS) verified the energy savings and compliance with IRS guidelines, which is a prerequisite for claiming the deduction. This ensured the church’s new systems met the technical criteria for energy efficiency and set the stage for capturing valuable financial benefits.
179D Certification Yields Financial and Tax Benefits
The successful 179D certification translated the project’s energy savings into a tangible financial reward. By meeting the efficiency requirements, the church’s retrofit qualified for a $580,000 federal tax deduction under Internal Revenue Code §179D. Since the church is a tax-exempt entity (and thus cannot directly use tax deductions), it allocated this entire deduction to the ESCO that designed and implemented the energy-efficient HVAC improvements. In practical terms, this means the ESCO can deduct $580,000 from its taxable income thanks to the project’s results – a significant tax benefit that recognizes the firm’s role in achieving energy savings.
This allocation process is a cornerstone of 179D projects involving government or non-profit buildings. The ESCO in this case was treated as the “designer” for 179D purposes, making it eligible to receive the deduction in lieu of the building owner. Walker Reid Strategies facilitated this outcome by providing the required certification documents and energy analysis to substantiate the deduction. The $580,000 deduction effectively offset a large portion of the project’s cost, improving the overall return on investment for the ESCO. In essence, the tax code rewarded the company for delivering a more efficient building. This financial benefit adds an extra layer of incentive for companies undertaking energy conservation measures – on top of the energy savings and client satisfaction achieved by such projects.
Inflation Reduction Act Expands 179D for Non-Profit Projects
It’s important to note that this church project took advantage of recent changes to the 179D tax deduction brought about by the Inflation Reduction Act (IRA) of 2022. Historically, only designers of government-owned buildings (federal, state, or local) could receive an allocated 179D deduction for energy-efficient building projects. However, the IRA expanded the scope of §179D to include buildings owned by tax-exempt organizations starting in 2023. Under the new rules, a much broader range of facilities – charitable entities, religious organizations (churches), private schools and universities, hospitals, and other non-profits – are now eligible to allocate the deduction to their design partners.
The IRA also significantly increased the potential value of the 179D deduction for energy-efficient designs. The maximum deduction jumped from about $1.80 per square foot in prior years to $5.00 per square foot (plus inflation adjustments) for projects meeting certain labor requirements. There is now a sliding scale: even a 25% improvement in energy efficiency qualifies for a base deduction (starting at $0.50 per sq. ft.), and savings of 50% or more can earn the full deduction rate. If prevailing wage and apprenticeship standards are met for the project, the deduction can reach the higher $2.50–$5.00 per sq. ft. range (versus $0.50–$1.00 without meeting those standards). For a large building like this church (over 260,000 square feet), these new rates dramatically increase the deduction opportunity – potentially into the seven figures.
Benefits for ESCOs and Design-Build Energy Firms
The 179D deduction has created a new financial incentive and revenue stream for ESCOs and design-build energy firms that work on efficiency projects for non-taxable entities. In the past, an ESCO upgrading a non-profit facility would only be compensated through project contracts, with no direct tax benefit. Now, thanks to 179D allocation, such companies can reap substantial tax savings for the same work.
Key Advantages for ESCOs:
- Improved Project Economics: The allocated tax deduction translates into real dollar savings on the ESCO’s tax bill, effectively boosting the profit margin of the project or providing capital that can be reinvested in the business.
- Competitive Bidding & Client Value: Knowing that a hefty deduction is available, ESCOs can offer more competitive pricing or enhanced scope in their proposals to non-profit clients.
- Encourages Comprehensive Energy Retrofits: The prospect of earning a large tax deduction incentivizes ESCOs to pursue deeper energy conservation measures that achieve higher savings.
- New Market Opportunities: The expansion of 179D to tax-exempt entities opens up a broad new market for ESCOs and design-build energy firms.
Conclusion
This 2024 church project exemplifies the importance of leveraging the Section 179D tax deduction to amplify the benefits of energy efficiency initiatives. With expert guidance and certification from Walker Reid Strategies, the collaboration between the ESCO and the church achieved a dual success: a modernized, energy-efficient HVAC system for the congregation, and a substantial tax deduction for the ESCO that made the project financially rewarding.
By taking advantage of the expanded 179D provisions under the Inflation Reduction Act, tax-exempt organizations and their design partners can unlock new value that was previously out of reach. Walker Reid Strategies is proud to serve as a strategic ally in this process, providing the certified energy studies and documentation needed to realize these deductions. The North Point church project’s success highlights how thoughtful planning, technical excellence, and smart use of 179D incentives can deliver win-win outcomes.
