As we approach 2025, businesses and real estate investors are facing a significant shift in tax strategy due to the ongoing phase-out of bonus depreciation. While this change may initially seem like a limitation, it presents an opportunity to explore other lucrative tax incentives, such as the 179D Energy-Efficient Commercial Buildings Deduction. Understanding how these changes impact tax planning can help businesses and property owners maximize their savings and improve the energy efficiency of their properties.
The Phase-Out of Bonus Depreciation
Bonus depreciation, a valuable tool for businesses to accelerate depreciation deductions on qualifying property, has been gradually phasing out since the passing of the Tax Cuts and Jobs Act (TCJA) in 2017. Previously allowing for a 100% deduction on qualified property placed in service, bonus depreciation began decreasing in 2023 and will continue its phase-out as follows:
- 80% in 2023
- 60% in 2024
- 40% in 2025
- 20% in 2026
- 0% in 2027 and beyond
This phase-out means that businesses will need to rethink their tax strategies, particularly those relying on accelerated deductions to offset taxable income. One viable alternative that remains robust is the 179D deduction.
The 179D Deduction: A Strong Alternative
The 179D Energy-Efficient Commercial Buildings Deduction provides a significant opportunity for commercial building owners, designers, and contractors working on government and tax-exempt projects. Thanks to the Inflation Reduction Act of 2022, the deduction has been expanded, increasing its value and accessibility.
Key Advantages of 179D in Light of Bonus Depreciation Changes
- Higher Deduction Amounts
- The updated 179D deduction allows for up to $5.65 per square foot (indexed for inflation) for qualifying energy-efficient improvements in commercial buildings.
- Partial deductions are available for improvements to HVAC, lighting, and the building envelope that meet specified energy efficiency thresholds.
- Recurring Benefits
- Unlike bonus depreciation, which applies only to capital expenditures in the first year, 179D deductions can be taken repeatedly on separate projects and even for retrofits and upgrades.
- Eligibility for Government and Tax-Exempt Projects
- Designers, architects, and engineers working on government buildings, schools, and other tax-exempt entities can qualify for the deduction if their designs contribute to improved energy efficiency.
- Supports ESG and Sustainability Goals
- With increasing emphasis on sustainability and energy efficiency, leveraging the 179D deduction aligns with corporate ESG (Environmental, Social, and Governance) objectives while providing substantial tax benefits.
Strategic Planning for 2025 and Beyond
As bonus depreciation continues its phase-out, businesses should proactively assess their tax strategies to optimize deductions. Here are some actionable steps:
- Evaluate Upcoming Projects: Identify commercial property improvements that could qualify for the 179D deduction.
- Work with Tax and Engineering Experts: Consulting with professionals, such as those at Walker Reid, ensures compliance with 179D requirements and maximizes tax benefits.
- Plan for Long-Term Energy Efficiency Investments: Since 179D is a permanent deduction, investing in energy-efficient improvements now can provide sustained tax savings.
Conclusion
While the phase-out of bonus depreciation may impact traditional tax strategies, it opens the door for businesses to leverage alternative deductions such as 179D. With its expanded benefits and continued availability, 179D serves as a powerful tool for commercial building owners and designers to optimize tax savings while enhancing energy efficiency. As we move into 2025, staying ahead of these changes and adapting tax strategies accordingly will be critical for maximizing financial benefits and operational efficiency.
If you’re interested in exploring how 179D can benefit your business or projects, contact Walker Reid today to learn more about our certification services and tax incentive consulting.
