What is 179D Tax Deduction and Do You Qualify?

The 179D Tax Deduction, born out of the Energy Policy Act of 2005, is like a golden ticket for those championing energy-efficient construction practices. Thanks to the Inflation Reduction Act of 2022, both building owners and designers can now cash in on up to $5.00 per square foot for crafting or upgrading buildings with energy-efficient goodies—think HVAC systems, interior lighting, and the building envelope.

To earn your golden ticket to the world of 179D Tax Deduction, your newly built or renovated structures must pass the initiation step. They need to satisfy an energy reduction criteria, a set of standards outlined in Reference Standard 90.1 by the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) and the Illuminating Engineering Society of North America. Note: retrofit projects may also qualify.

Think of these standards as your guides, ensuring you meet the energy efficiency criteria. To learn about ASHRAE standard 90.1, you can refer to the FAQ section towards the end.

Which Buildings Qualify for 179D Tax Deduction?

To make the cut for the 179D Tax Deduction, your building needs to align with the energy-efficient standards. If you're implementing Energy Efficient Commercial Building Property (EECBP), it must be in a U.S. building complying with Reference Standard 90.1 by ASHRAE. This property, eligible for depreciation or amortization, should encompass:

• Interior lighting systems
• Heating, cooling, ventilation, and hot water systems
• Building envelope

But wait, there's an encore—you need the certification stamp. Confirm its installation as part of a master plan to slash the total annual energy and power costs by 25% or more compared to the bare minimum of Reference Standard 90.1.

Now, shifting the spotlight to Energy Efficient Building Retrofit Property (EEBRP). It's the headliner if installed in or on a qualified building—a U.S. building with at least 5 years under its belt before the grand retrofit plan. EEBRP, also eligible for depreciation or amortization, must encompass:

• Interior lighting systems
• Heating, cooling, ventilation, and hot water systems
• Building envelope

Of course, it still needs the final green light—certification. A professionally licensed engineer that has jurisdiction authority in the state in which the building is located must perform a site visit. Voila, you're in the tax break limelight.

And as you know now, since January 2023, there have been updates to the 179D deduction.

So, when it comes to deductions from tax-exempt entities including,

Public organizations like –

• K-12 schools, 
• higher education institutions, 
• libraries, 
• municipal buildings (police, fire stations, courthouses, etc.), 
• public offices, 
• parking garages, and 
• airport terminals are now part of the mix.

And don’t hit the pause there, other tax-exempt entities such as –

• charitable organizations, 
• religious institutions, 
• private schools and colleges, 
• non-profit hospitals, 
• private museums, and 
• any other organization falling under Section 501(c) are also now eligible for these deductions, broadening the scope of the 179D deduction.

Who is Eligible for claiming 179D tax incentive?

You're eligible for the tax deduction credit if you're hands-on in constructing a commercial building or if you're the owner of a qualified commercial building sprucing things up for energy efficiency.

Now, drumroll for the Inflation Reduction Act of 2022—it's the star of the show. This act brings in a boosted tax deduction, casting a wider net of eligibility that includes real estate investment trusts (REITs) and more.

Hold onto your hat, because here's the exciting twist—if you're the design virtuoso behind Energy Efficient Commercial Building Property (EECBP) or Energy Efficient Building Retrofit Property (EEBRP) installed in buildings owned by specific tax-exempt entities, like the federal government, state or local government, Indian tribal government, and other tax-exempt organizations (as we've mentioned above)—you, our friend, can now snag this tax benefit. Quite the spotlight for the designers weaving energy-efficient wonders in government realms and tax-exempt domains.

Here's who fits the bill:

1. Architects and Engineers: If you're the brain behind technical specs, designing elements like the building envelope, HVAC system, and lighting, you're likely eligible.
2. Construction Contractors: If you're part of the design process per your contract, you can snag this benefit.
3. ‍Taxpaying Designers of Tax-Exempt Entities: Working on big commercial projects owned by tax-exempt entities? The tax deduction can head your way as the taxpaying designer responsible for the energy-efficient work.
4. ‍Building Owners and Tenants of existing buildings: If you’re an owner boosting energy efficiency in existing buildings, you also qualify. Tenants can also get in on it by making construction expenditures aimed at energy efficiency.
5. ‍Commercial Building Owners: Owners who are taxpayers can leverage the program for accelerated depreciation. Notably, now this includes entities that may not benefit directly due to tax-exempt status, like municipalities, government facilities, schools, and universities. In such cases, the deduction can be allocated to the taxpaying designer responsible for the energy-efficient features.

How much amount can you claim as deduction?

As per IRS guidelines based on Internal Revenue Code (IRC), you can receive deductions under section 179D, as under –

Amount of Deduction for 2023 and after –

Sec. 179D Deduction: $5.00/sq. ft

Construction Type: Prevailing Wage

Wage Requirement: Met

ASHRAE Standard: Reference Standard 90.1 (4 years prior to in-service date)

Energy Reduction: Every percentage

Deduction Increase: $0.10/sq. ft

Maximum Deduction Formula: Lesser of Installed Property Cost or Savings per sq. ft

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Sec. 179D Deduction: $2.50/sq. ft

Construction Type: Prevailing Wage

Wage Requirement: Not Met

ASHRAE Standard: Reference Standard 90.1 (4 years prior to in-service date)

Energy Reduction: Every percentage

Deduction Increase: $0.02/sq. ft

Maximum Deduction Formula: Lesser of Installed Property Cost or Savings per sq. ft

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Sec. 179D Deduction: $1.00/sq. ft

Construction Type: No Prevailing Wage

Wage Requirement: N/A

ASHRAE Standard: N/A

Energy Reduction: Every percentage

Deduction Increase: $0.02/sq. ft

Maximum Deduction Formula: Lesser of Installed Property Cost or Savings per sq. ft

Prevailing Wage Requirements for 2023 Projects and Onward:

• If your construction or installation journey began before January 30, 2023, prevailing wage rates won't be a hurdle for the higher tier deductions ($2.50 to $5.00/sq. ft).
  
• However, if your groundbreaking moments occurred on or after January 30, 2023, meeting prevailing wage rates becomes the key to unlocking those higher tier deductions ($2.50 to $5.00/sq. ft).

Maximum Deduction based on Savings Rate Formula for Property Placed in Service in 2023 and After:

For projects stepping into service in 2023 and beyond, your deduction will dance to the rhythm of the lesser of the installed property cost or the savings per square foot, calculated as follows:

• $0.50 per square foot for a building with 25% energy savings.
• Adding $0.02 per square foot for each percentage point of energy savings above 25%.
• Climbing up to a maximum of $1.00 per square foot for a building with 50% energy savings.

This formula is the maestro determining the maximum deduction based on the building's energy efficiency performance.

Prevailing Wage and Apprenticeship Bonus:

Starting in 2023, if you're matching footsteps with local prevailing wages and fulfilling apprenticeship requirements, your maximum deduction takes center stage, soaring to 5 times the savings per square foot amount. It's a significant bonus for your efforts!

Amount of Deductions for buildings constructed in 2022 and Prior –

Compliance Path: Fully Qualifying Property

Savings Requirement*: 50%

Tax Deduction*(Prior to 2023): $1.80/ft²

Tax Deduction 2022: $1.82/ft²

Tax Deduction 2023: $1.88/ft²

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Compliance Path: Partially Qualifying Property Envelope

Savings Requirement*: 10%

Tax Deduction*(Prior to 2023): $0.60/ft²

Tax Deduction 2022: $0.61/ft²

Tax Deduction 2023: $0.63/ft²

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Compliance Path: Partially Qualifying Property HVAC and HW

Savings Requirement*: 15%

Tax Deduction*(Prior to 2023): To be determined

Tax Deduction 2022: To be determined

Tax Deduction 2023: To be determined

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Compliance Path: Partially Qualifying Property Lighting

Savings Requirement*: 25%

Tax Deduction*(Prior to 2023): To be determined

Tax Deduction 2022: To be determined

Tax Deduction 2023: To be determined

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Compliance Path: Interim Lighting Rule

Savings Requirement*: 25%–40% lower lighting power density (50% for warehouses)

Tax Deduction*(Prior to 2023): $0.60/ft²*

Tax Deduction 2022: $0.61/ft²*

Tax Deduction 2023: $0.63/ft²*

* Your savings are calculated based on reduced energy costs for lighting, HVAC, and hot water compared to a standard by 2020. The deduction won't exceed your property's cost and is adjusted for lighting power density reduction.

Few things for you to note regarding 179D for 2022 and prior –

Revamping or constructing a building from 2006 to 2022 with top-notch HVAC, lighting, and envelope meeting or surpassing ASHRAE standards? Guess what? You could snag the §179D Deduction. Here's the scoop – if your upgrades kick off post-2020, the ASHRAE standard you need to meet is the one from two years before your construction started.

And it's not just for the bigwigs—architects, engineers, and government project designers, you're in the game too. New builds or retrofits, even parking garages and towering residential spots, could get you in on the deduction action.

Calling you, government project designers – you've got a three-year window to claim deductions, covering projects like schools, libraries, municipal buildings, public offices, and more.

Quick tip – that $1.80 per square foot deduction limit? It's a one-time deal for your specific building. So, if you're maxing out at $90,000 in 2021, your future deductions won't top that for the same spot. Get ready for some serious savings!

Unpacking Your Questions About the 179D Tax Deduction –

What is Energy Efficient Commercial Building?

Energy efficient commercial building property is depreciable property that, as per Section 179D(c)(1), must meet specific conditions. It should be installed in a U.S.-located building, adhering to the standards of Standard 90.1-2001. This property is typically part of the building's interior lighting systems, heating, cooling, ventilation, and hot water systems, or the building envelope. Moreover, it must be certified that these integrated systems will result in a minimum 50% reduction in total annual energy and power costs compared to a Reference Building meeting the standards of Standard 90.1-2001.

What is ASHRAE Standard 90.1?

ASHRAE Standard 90.1, also known as the "Energy Standard for Buildings Except Low-Rise Residential Buildings," is a set of guidelines developed by the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE). It provides minimum requirements for the energy-efficient design of commercial buildings, excluding low-rise residential structures of three floors or fewer. The standard covers the energy efficiency criteria for designing and constructing new buildings and systems, as well as additions to existing structures.

Compliance with ASHRAE Standard 90.1 ensures that buildings meet specified energy efficiency benchmarks, promoting sustainable and environmentally conscious construction practices.

Wrapping it Up –

Don’t miss out on your chance to save some penny – 179D Tax Deduction, where savings can soar up to $5.00 per square foot. Whether you're an architect, engineer, or building owner, this financial boost is within reach.

But we understand that going through the rules and calculations can be complex, but fear not! Partner with 179D tax experts like TaxTaker who understand the nuances. They'll decipher wage requirements, handle the math, and guide you to optimal savings.

Amplify your savings, champion sustainable practices, and let professionals navigate the complexities.

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