§179D tax deduction
Pre-IRA Requirements
Pre-IRA: Requirements
(Placed in Service Before 12/31/2022)
Certification Requirements
§179D requires the taxpayers building to meet or exceed a 50% savings in energy and power costs when compared to a theoretical ASHRAE 90.1-2007 baseline building. If the target of 50% savings is met, the building will qualify for $1.80/SF (capped at the costs of the capitalized improvements).
For buildings that do not meet the 50% savings, the tax provision also allows for partially qualifying systems.
- $0.60/SF for HVAC systems meeting 15% savings
- $0.60/SF for Lighting systems meeting 25% savings
- $0.60/SF for Building Envelope systems meeting 10% savings
Additionally, the Interim Lighting Rule allows for lighting systems to qualify for 30¢-60¢per square foot for a 25%-40% savings in Lighting Power Density (LPD) compared to ASHRAE 90.1-2007 LPD standards.
Additional Certification Requirements
- The energy and power cost savings calculations must be performed with a Dept. of Energy approved software.
- Field inspections must be performed after the energy-efficient property has been placed into service in accordance with NREL Guidelines
- Certifications and inspections must be completed by a qualified Engineer or Contractor in the Jurisdiction of the qualifying building.
- The taxpayer shall maintain the certification in their records to establish the entitlement to, and amount of, the deduction claimed.
Government Owned Buildings
Governments are non-taxable entities and are unable to benefit from the §179D tax incentive. Because of this, the IRS established guidance in 2008 allowing governments to allocate the deduction to the parties involved in the design of the energy-efficient systems. In addition to the certification, the taxpayers receiving an allocated deduction must retain an “Allocation Letter” in their records.
Allocation Letter
On April 7, 2008, the IRS published Notice 2008-40 providing guidance for the Allocation of the deduction to designers. The primary points addressed in the allocation are:
- Verifying the parties’ involvement in the project
- Cost of property installed
- The year the property was placed into service
- The amount of the §179D deduction being allocated
Click here to see the full IRS Publication
What Buildings Qualify?
- Commercial Buildings of any type
- Residential Buildings of 4 Stories or more
- Government-owned buildings
- Parking Garages
Who can benefit?
- For-profit owners of commercial buildings
- For-profit owners of Apartment Buildings (4 or more stories)
- Designers of Government Buildings
- Architects
- Engineers
- ESCO’s
- Energy Consultants
Time Frame
For Commercial Building Owners, the §179D deduction may be claimed for new construction or improvements placed into service after January 1, 2006. Form 3115, Change in Accounting Method, may be used to retroactively take the deduction in current year tax filings and avoid amending previous year returns.
The designers of government-owned buildings are able to take the §179D deduction for all “open tax years” (generally 3 years from the date of filing). For property placed into service in previous years, the taxpayers are required to amend their returns.
Changes coming under the Inflation Reduction Act of 2022 (Effective for energy-efficient commercial buildings placed in service after 1/1/2023)
The current version of §179D will remain in effect for properties placed in service in 2022, currently, you can achieve up to $1.88/SF (expected to increase up to $2.00/SF with current inflation adjustment provisions that are in place), the major improvements to the §179D are the following:
- 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
§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 $0.50 - $5.65 S/F
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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