The benefit of “new phase” energy-efficient improvements to previously claimed 179D projects
Until the passage of the Inflation Reduction Act of 2022, property owners had a lifetime max per building of $1.80/sf to pursue Section 179D tax deductions:
There’s an important new change that property owners should also know about. Prior to IRA passage, Section 179D was a “one-and-done” deduction. The 2022 IRA legislation included a provision for a deduction reset every three years for commercial buildings and every four years on a building owned by a tax-exempt entity if subsequent energy improvements are completed.
Previously, the Section 179D deduction was capped at $1.80/sq ft, plus any applicable inflation adjustments. This deduction itself has changed for buildings placed into service after Dec. 31, 2022, and you can read more about that in our blog post.
There are numerous examples of where this is likely to come into play. One of the most common is the periodic renovation of existing school buildings. Taxpayer-funded referendums often include funds earmarked for building updates that include qualifying energy efficiency improvements. Long-term projects that stretch over several years (and several windows) and include multiple energy-efficient system upgrades in phases may also qualify for additional Section 179D deductions. Replacement of existing aging systems in commercial buildings also typically qualifies since these improvements achieve the required energy efficiency improvements.
If new work is completed on a EECB project post-IRA that qualifies under the existing requirements – which also requires all the steps necessary for a new Section 179D deduction, property owners can claim the delta between the new IRA Section 179D maximum deduction of $5.00/ sq ft and the Section 179D deduction already claimed.
Here’s an example of how this could be interpreted, as the IRS has not yet released a bulletin or guidelines. A commercial project completed in 2020 received $1.80/sq ft for lighting and controls improvements. In 2023, the building owner replaced the existing HVAC equipment with a new system that improves the building’s energy efficiency. The entire project would now qualify at $5.00/ sq ft. Under the new addition found in the IRA, the client could take an additional $3.20/sq ft (the maximum $5 deduction less the previously-taken $1.80/sq ft without having to wait for the three- or four-year window to be in effect to essentially claim the additional Section 179D deduction.
Should the IRS release a bulletin clarifying the deduction reset, we will provide an update to this blog post.
About the Author:
David Diaz is a partner at Walker Reid Strategies, a licensed professional engineering firm specializing in performing §179D studies and §45L certifications. Mr. Diaz is an expert in energy efficiency and specialty tax services who shares his insights at www.walkerreid.com and online through webinars. For more information on how to interpret the §179D reset provision, contact him at ddiaz@walkerreid.com.
