§179D tax deduction
Post-IRA Requirements
Post-IRA: Requirements
(Placed in Service 01/01/2023 or Later)
In general, barring any changes or notices/guidance from the U.S. Treasury Department, the certification requirement for §179D Tax Deduction will be the same as they have always been with the following adjustments:
- Energy-efficient commercial buildings placed in service after January 1, 2023, will have the opportunity to qualify under IRA provisions and increase the §179D from $1.88/SF to $5.81/SF. This is exciting news for the energy-efficient commercial building industry
- Designers of energy-efficient commercial buildings, such as Architects, Engineers, Design Build Contractors, Energy Service Companies, and Performance Contractors, can now have tax-exempt building owners, including tribal governments to also allocate the §179D Tax Deduction to them in addition to government-owned buildings.
- A special provision for performance-based qualification methodology will be enacted for retrofitting commercial buildings.
- Commercial buildings will be able to be certified and claimed once every three years if privately owned and once every four years if government-owned and allocated to the designer
The qualification criteria changes that will be effective for properties placed in service from January 1st, 2023 through December 31, 2032, are as follows:
- For projects meeting the prevailing wage and apprenticeship requirements, energy reduction standards will change as follows; 50% reduction against the ASHRAE standard will now be 25% and will yield a §179D Tax Deduction of $2.50/SF and for every 1% of additional reduction above 25% it will provide an additional $0.10/SF of deduction up to $5.00/SF
- For buildings that DO NOT MEET the prevailing wage and apprenticeship requirements, energy reduction standards will change as follows; 50% reduction against the ASHRAE standard will now be 25% and will yield a §179D Tax Deduction of $0.50/SF and for every 1% of additional reduction above 25% it will provide an additional $0.02/SF of deduction up to $1.00/SF
- ASHRAE standards to be used for qualifications shall be the ASHRAE standard that was affirmed four years prior to the dates on which the commercial building property was placed into service.
- A New qualified retrofit plan for actual performance-based qualification will be in place. Actual guidelines on how this program will work will be released in the future by the DOE/Secretary
§179D TAX DEDUCTION: POST-IRA
(Placed in Service 01/01/2023 or Later)
§179D TAX DEDUCTION: PRE-IRA
(Placed in Service Before 12/31/2022)
UP TO $5.81/SF
Includes Inflation Adjustment add-on
UP TO $1.88/SF
Includes Inflation Adjustment add-on
PARTIAL - BETWEEN $.50 - $5.81/SF
Partial Deductions Available Based on Energy Qualifications and Labor Requirements
PARTIAL- $0.60/SF PER CATEGORY
Partial Deduction Available depending on energy savings per category (Lighting, HVAC, Building Envelope)
LABOR REQUIREMENTS FOR INCREASED BENEFIT
5x Multiplier in effect for compliance with Prevailing Wage and Apprenticeship Requirements
NO LABOR REQUIREMENTS
Labor Requirements do not affect legacy §179D Tax Deduction Amounts
TAX-EXEMPT ORGANIZATIONS
Expanded to include ALL tax-exempt organizations
GOVERNMENT BLDGS. ONLY
Only Government Building Owners may Allocate §179D to designers.
WHOLE BUILDING ANALYSIS REQUIRED
Can no longer use partial system analysis for qualification
WHOLE BUILDING OR PARTIAL CATEGORY
Labor Requirements do not affect legacy §179D Tax Deduction Amounts
RE-CERTIFY BUILDINGS FOR NEW ENERGY IMPROVEMENTS
If new capital expenditure occurs private sector can be re-certified every 3 years, and tax-exempt every 4 years
PREVIOUSLY LIMITED TO $1.80/SF
Prior to IRA changes §179D was only available up to $1.80/sf over the life of a building
ASHRAE STANDARDS
ASHRAE 90.1-2007 is the standard through 12/31/2026, increases to 90.1 2019 after 1/1/2027
ASHRAE STANDARDS
ASHRAE 90.1-2001 through 12/31/2014 and 90.1 2007 between 1/1/2015 and 12/31/2026
ADDITIONAL QUALIFICATION METHODOLOGIES
Retrofits may use Energy Use Intensity methodology (Pre and Post Retrofit Measurement and Verification)
INTERIM LIGHTING RULE AVAILABLE
A simplified methodology for the lighting category maybe used, with additional partial qualification opportunities.
Additional Resources
- Energy Policy Act of 2005: Original bill enacting §179D
- Title 26 USCS §179D: Original Tax Law
- 2006-26 IRB; Notice 2006-52; Initial IRS guidance setting forth the process allowing building owners to take the §179D Deduction; including certification requirements, inspections, and energy modeling guidelines.
- 2008-14 IRB; Notice 2008-40: Allows Government buildings to allocate to designers, expands on the specific technologies the DOE must approve, adjustments to the partially qualifying percentages (10% for building envelope), also extends §179D to the end of 2008.
- 2011-04 IRB; Rev. Proc. 2011-14: Primarily allows for the use of Form 3115, Change in Accounting Method. Allows taxpayers to take §179D deductions without having to amend prior year tax returns. For both private and public sector buildings.
- 2012-17 IRB; Notice 2012-26; Adjusts the partially qualifying percentages to 15% for HVAC and 25% for Lighting.
- 2012-41 IRB; Rev. Proc. 2012-39: Clarifies that designers taking the §179D deduction for Government-owned buildings may not use Form 3115, Change in Accounting Method.
- Public Law 110-343: Emergency Economic Stabilization Act of 2008: Extends §179D through the end of 2013.
- Memorandum; AM2010-007: Addresses the application of the §179D deduction to flow through entities.
- Public Law 113-295: Tax Increase Prevention Act of 2014; Extends §179D through the end of 2014.
- NREL /TP-550-40467: Energy Savings Modeling and Inspection Guidelines for Commercial Building Federal Tax Deductions
- Department of Energy List of Approved Energy Modeling Software
- IRS Form 3115, Change in Accounting Method
- Public Law 114-113: Consolidated Appropriations Act, 2016; Extends §179D through the end of 2016 and increases the ASHRAE 90.1-2001 efficiency standards to ASHRAE 90.1-2007 for property placed into service after January 1st, 2016
- Public Law No: 115-123: Bipartisan Budget Act of 2018; Extends §179D through the end of 2017.
- Public Law No: 116-94: the Further Consolidated Appropriations Act, 2020; Extends §179D retroactively from January 1st, 2018 through December 31st, 2020.
- Memorandum AM-2018-005: Addresses Eligibility for Allocation of the Deduction for Energy Efficient Commercial Building Property under §179D(d)(4).
- Consolidated Appropriations Act, 2021: Makes §179D permanent and extends the energy-efficient commercial building tax deduction.
- 2021-48 IRB; Rev. Proc. 2021-45: This revenue procedure sets forth inflation-adjusted deduction rates for property placed into service in both 2021 and 2022. The rate increases range from 1.1% to 5%.
Public Law No: 117-169: The Inflation Reduction Act of 2022; expands §179D and §45L drastically, increasing the §179D Tax deduction amount up to $5.00 per square foot, adding new methodology for certification of the deduction, including benefit for non-profits and tribal governments, in addition to increasing the ASHRAE Standards and adding a Prevailing Wage and Apprenticeship requirements.
2022-61 IRB: Notice 2022-61: Prevailing Wage and Apprenticeship Initial Guidance under §45(b)(6)(B)(ii) and Other Substantially Similar Provisions
- 2023-01: Announcement Announcement Updating the Reference Standard 90.1 for §179D allowing the use of ASHRAE 90.1 through 2026
- Tax Court Case: Michael Johnson, et al v. Commissioner, 160 T.C. No. 2.: In a T.C. Opinion, the Tax Court has held that a heating, ventilation and air conditioning (HVAC) contractor is entitled to a $305k IRC §179D (deficiency amount) deduction because the HVAC system the company installed in a Veterans Administration (VA) building constituted “energy efficient commercial building property” under IRC §179D(c)(1) and a VA official had properly allocated the available IRC §179D deduction to the HVAC contractor.
- 2024-24: Announcement Announcement Updating the Reference Standard 90.1 for §179D allowing the use of ASHRAE 90.1 through 2028.
- America v. Oehler et al. Court Case highlighting the importance working with energy tax experts to ensure correct deduction qualification criteria are met.
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