Introduction
Energy-efficient construction not only lowers utility bills – it can also unlock significant tax savings. One prime example is a recent multifamily housing and parking garage project in New York, completed in 2022, where the developer partnered with Walker Reid to achieve a Section 179D certification. This collaboration highlights how commercial property owners and developers can benefit from the §179D Energy Efficient Commercial Building Tax Deduction, even for past projects, by leveraging advanced engineering technologies in lighting, HVAC, and building envelope design.
In this blog post, we’ll provide an overview of Section 179D and its benefits, explain how private companies can retroactively claim deductions without amending tax returns, discuss the energy- efficient design features that contributed to the building’s performance, and underscore the importance of working with qualified professionals to ensure certification and compliance.
What is Section 179D and How Does It Benefit Developers?
Section 179D of the Internal Revenue Code is a federal incentive that rewards energy-efficient
building design. It offers commercial building owners (and in some cases designers) a one-time
tax deduction based on the efficiency of their property’s systems. The deduction allows up to
$1.80 per square foot (indexed for inflation) for buildings that achieve significant energy savings.
For projects placed in service in 2022, the maximum deduction was $1.88 per square foot.
This deduction applies to new constructions or retrofits that incorporate qualifying energy-
efficient systems in three key areas:
- Interior Lighting Systems: High-efficiency LED fixtures, daylight-responsive controls, and occupancy sensors to reduce energy use.
- HVAC and Hot Water Systems: Efficient heating, ventilation, and air conditioning equipment, such as high-SEER heat pumps, energy recovery ventilators, or advanced chillers and boilers.
- Building Envelope: Enhanced insulation, high-performance windows, and cool or green roofing to minimize heat loss and gain, reducing HVAC system demand.
By installing such features, building owners not only save on energy costs but can significantly
reduce their tax liability through 179D. The deduction accelerates depreciation of the energy-
efficient investments into the first year, providing a substantial immediate tax write-off. For
developers and property owners, this improves the return on investment for sustainable building
features.
To earn the full deduction, a building must achieve at least 50% reduction in total annual energy and power costs compared to a baseline building defined by ASHRAE Standard 90.1. Partial deductions are available for lighting, HVAC, or envelope systems that individually meet certain improvement thresholds. In the case of the New York multifamily project, the integrated approach – combining efficient lighting, HVAC, and envelope – succeeded in cutting energy usage enough to hit the 50% savings mark, qualifying the development for the maximum deduction per square foot
Leveraging 179D for Past Projects (Without Amending Returns)
One common question is: What if you didn’t claim a 179D deduction when the building was completed? Is it too late? The good news for private sector building owners is that they can still claim 179D deductions for past projects without having to amend previous tax returns.
The IRS allows taxpayers to use Form 3115 (Change in Accounting Method) to claim missed 179D deductions retroactively in the current tax year. This means a developer who finished an energy-efficient building a year or two ago can have a qualified 179D study done now and, if the project qualifies, fold the resulting deduction into their current year’s tax filing.
This approach simplifies the process—no need to reopen or alter past returns, which can be
time-consuming and costly. Instead, the deduction effectively “catches up” on the current return
as an adjustment. In the New York case, even though the multifamily and garage project was
completed in 2022, the developer was able to pursue the 179D certification after project
completion and apply the tax benefit to their present finances.
For private developers and property companies, the Form 3115 strategy is a powerful tool. It
underscores why it’s valuable to periodically review past projects for any unclaimed incentives.
If you’ve invested in efficient building systems in recent years and haven’t taken the 179D
deduction, you might still be able to go back and reap those tax benefits now—provided you
work with qualified experts to certify the savings and navigate the filing procedure.
Energy-Efficient Design Features That Drove Savings
The New York multifamily building and its parking garage qualified for the 179D deduction thanks to a combination of smart lighting design, high-performance HVAC systems, and an improved building envelope. Here’s how each of these played a role:
- Advanced Lighting Systems: The entire complex uses energy-efficient lighting, primarily LED fixtures, which consume far less electricity than traditional lighting. In the parking garage, for example, the lighting power density was reduced by approximately 37% compared to standard code levels. Intelligent controls, such as bi-level switching and occupancy sensors, were installed in required spaces, ensuring lights dim or shut off when an area is unoccupied or when daylight is sufficient.
- High-Efficiency HVAC Systems: The building’s HVAC system was optimized for energy savings with high-efficiency boilers, chillers, and heat pumps. Variable frequency drives (VFDs) were likely installed on fans and pumps, allowing the system to adjust based on demand rather than running at full power constantly. Energy recovery technology was also used to capture waste heat from exhaust air, further reducing energy consumption.
- Enhanced Building Envelope: The exterior envelope was designed for superior thermal performance, including robust insulation in walls and roofs, high-performance windows, and tight air-barrier details to minimize air infiltration. These improvements helped reduce overall heating and cooling loads, contributing to the 50% total energy savings required for full 179D qualification.
By integrating these technologies, the developer not only reduced operating expenses for the property but also maximized tax incentives. The success of this project demonstrates that an integrated approach to efficiency leads to compounding benefits—lower energy costs and higher tax deductions.
Certification and Compliance: The Importance of Qualified Professionals
While the benefits of 179D are compelling, obtaining the deduction requires a formal certification process conducted by qualified professionals. The IRS mandates that a licensed professional (engineer or contractor) certify the energy-efficient property and verify that it meets the required performance standards.
This involves detailed energy modeling using DOE-approved software and, in many cases, a site inspection to confirm the installation of qualifying systems. In the case of the New York project, Walker Reid’s team of experts handled this process, which was critical to successfully claiming the deduction.
Qualified professionals ensure compliance with IRS regulations, prepare the necessary documentation, and work with tax advisors to apply the deduction. This avoids the risk of non-compliance and audit disallowance. With a certified 179D study, building owners have robust support for their tax claim, complete with an engineer’s certification and detailed energy savings reports.
For developers considering 179D, it’s wise to engage professionals early in the process. They can identify qualifying opportunities, guide design decisions, or evaluate existing buildings for
eligibility.
Conclusion
The New York multifamily and parking garage project exemplifies how commercial developers can benefit from Section 179D when they commit to energy efficiency and work with the right experts. Section 179D provides a powerful incentive—potentially millions of dollars in tax
deductions—to encourage the construction of greener buildings. Even if a project was completed in the past few years, it’s not too late for private owners to capture this value through retroactive claims.
By combining innovative, energy-saving technologies with proper certification by qualified professionals, developers can maximize their tax benefits while improving sustainability. The key takeaway is that energy efficiency pays off—not just in long-term savings, but in immediate tax incentives as well.
For property owners and developers, considering Section 179D from the outset ensures the best financial and environmental outcomes. By doing so, you’ll position your project to save energy, earn tax benefits, and enhance long-term value.
