§179D Tax Deductions for Energy-Efficient Projects
What is the §179D Tax Deduction?
Commercial building owners and designers of public building projects that incorporate certain sustainable building components can qualify for the EPAct §179D tax deduction. Starting in 2023, the designers of tax-exempt-owned energy efficient building projects can also qualify for the §179 tax deduction.
As energy costs rise, reducing those costs is a priority for most public and private organizations. Source Advisors helps building owners and design firms understand and fully leverage this incentive.
Through 2022, the Energy Policy Act (EPAct) §179D tax deduction provides a deduction of up to $1.88 per square foot for the installation of systems that reduce the total energy and power costs by 50% in comparison to a building meeting minimum requirements set by ASHRAE Standard 90.1-2007.
Eligible building systems include the building envelope, interior lighting systems, heating, cooling, ventilation, and hot water system.
*Taxpayers who begin construction before 1/1/2023 may apply Reference Standard 90.1-2007 regardless of when the building is placed in service.
What are the Benefits of the §179D Tax Deduction?
Under Section §179D of EPAct, energy-efficient building owners and designers can have significant cost savings by qualifying for this tax deduction. Building owners and designers of public projects can potentially receive a full deduction of $1.88/SF or a partial tax deduction of $0.60/SF for lighting, HVAC, and building envelope.
How Building Owners & Designers of Public Projects Use the EPAct §179D Tax Deductions
If your company builds, owns or leases commercial buildings, and you have installed or retrofitted the property to be more energy-efficient, you may be eligible to deduct all or part of the costs associated with the installation or retrofit.
The company or person that makes the expenditures for construction is generally the recipient of the §179D deduction. Usually this is the building owner, except in the case of designers of government-owned buildings, and after 2022 designers of tax-exempt owned buildings.
The deduction can be claimed for projects placed in service after January 1, 2006 by filing a Form 3115 or amending the tax returns.
Many designers are not aware that their sustainable building designs may qualify for the EPAct §179D tax deduction. Energy-efficient building property that is owned by a federal, state, or local government, or a political subdivision thereof, the owner of the property may allocate the §179D tax deductions to the primary designer(s) of the building.
The primary designer is the person who creates the technical specifications for installation of energy-efficient commercial building property for a new building or addition/renovations to an existing building.
A designer may be an architect, engineer, contractor, environmental consultant, or energy services provider.
Determining Eligibility of the EPAct §179D Tax Deductions
Must be paying federal income tax.
The §179D deduction can be claimed for projects placed in service on or after January 1, 2006 by filing a Form 3115 or amending their tax returns.
For Designers: Firms structured as a pass-through entity, including S-Corps, LLCs, LLPs and partnerships, can take advantage of the EPAct §179D tax deduction up to the amount of shareholder “basis” or retained earnings.
For Designers: Deductions taken in excess of basis are exercised at a reduced amount.
For Designers: Past three tax years’ returns can be amended to claim the EPAct §179D deduction, potentially generating a refund from the IRS.
Selecting Projects – Energy-Efficient Tax Deductions Criteria
Includes new construction, renovations, and additions.
Before 2023, Non-profit buildings do not qualify. After 2023, tax-exempt owned buildings qualify.
For Designers: Projects in which your firm is primarily responsible for the design.
For Designers: Any government or municipal building located in the U.S. and substantially completed during the last 3 years’ filing periods can potentially qualify.
Which Buildings Qualify for the §179D Tax Deductions?
Before 2023, to qualify for a full or partial deduction, the energy-efficient building must meet the following criteria:
Must have been placed in service since January 1, 2006.
Must be located in the United States.
Installation made is part of interior lighting systems, HVAC and hot water systems, and the building envelope.
Energy and power consumption calculations are based on IRS-approved software programs that compare the subject facility to an ASHRAE reference building.
Must be certified by an IRS-qualified professional engineer or contractor licensed in the same jurisdiction as the proposed building.
In addition, the IRS provides Interim Lighting Rules as an alternative method of evaluation. These rules allow a watts-per-square-foot calculation or a lighting-power-density calculation to be used in lieu of modeling when measuring energy efficiency.
Lighting ≥ 25% = $0.60
HVAC ≥ 15% = $0.60
Envelope ≥ 10% = $0.60
25% to 40% = $0.30to 40.60
In addition, the IRS provides Interim Lighting Rules as an alternative method of evaluation. These rules allow a watts-per-square-foot calculation or a lighting-power-density calculation to be used in lieu of modeling when measuring energy efficiency.
After 2022, to qualify for a full or retrofit deduction, the energy-efficient building property must meet the following criteria:
Full Building Qualification:
- Deduction increases to a $2.50 per square foot with 25% energy savings. The deduction increases by $0.10 per square foot for every percentage increase until it reaches $5.00 per square foot with 50% energy savings; prevailing wage and apprenticeship requirements must be met.
- If prevailing wage and apprenticeship requirements are not met: The tax deduction is $0.50 per square foot for 25% savings and $1.00 per square foot for a reduction of 50 percent.
Inflation Adjustment:
- $2.68 – $5.36 per square foot
- $0.54 – $1.07 per square foot
The allocation of the deduction by government agencies to designers has now been expanded to allow other tax-exempt entities to allocate the deduction to a designer.
Retrofit Projects:
- This alternative deduction is based on reduction in energy use intensity of the existing building.
- The deduction is limited to buildings originally placed in service at least 5 years before the qualified retrofit plan is established.
Building types that are excluded from Section §179D:
Single-family homes.
Multi-family residential buildings of three or fewer stories above grade.
Manufactured homes.
Buildings without fossil fuel or electricity use.
Buildings owned by non-profit organizations.
Cold Storage Building (if they are mostly for refrigeration).
Is the §179D tax deduction permanent?
On December 27, 2020, a $1.4 trillion omnibus spending bill with tax extenders was signed into law. The tax provisions include a permanent extension of the §179D Energy-Efficient Commercial Buildings Tax Deduction.
Defining the Free Assessment through Source Advisors
Upload MEP/Architectural drawings and building specs to our team of engineers via our secure server.
Completed estimate includes the amount of the potential tax deduction and the fee per square foot to certify the project.
What To Expect with Source Advisors as Your §179D Tax Credit Partner
Will consult with your CPA to determine your firm’s ability to use the §179D tax deduction.
A free assessment of your projects for the §179D tax deduction.
All modeling conducted in-house using IRS-approved software.
Complimentary service in drafting the Allocation Form and obtaining signatures.
Detailed documentation to support the tax deduction §179D with complimentary audit support.
Ready for help with your
§179D energy credit?
FAQs
What documents are required if my business performed §179D work on a government-owned building?
You would need to obtain an allocation letter from that government entity that transfers the Section §179D benefit directly to you. At Source Advisors, our team handles this process from start to finish on your behalf.
To qualify for §179D energy-efficient buildings deduction, is an independent third-party required to review the building?
You would need to obtain an allocation letter from that government entity that transfers the Section §179D benefit directly to you. At Source Advisors, our team handles this process from start to finish on your behalf.
How do I claim my §179D deduction?
To claim your §179D deduction, the IRS requires your energy-efficient building must be certified as installed as part of a plan designed to reduce the total annual energy and power costs by 50% or more.
Do LED lights qualify for §179D tax credit?
Lighting systems must include automatic controls prescribed in the ASHRAE 90.1 standard and a provision for bi-level switching in all spaces except hotel and motel guest rooms, storerooms, restrooms, and public lobbies. The illuminance levels must meet the minimum requirements as per the IESNA lighting handbook.
Which types of HVAC and/or plumbing qualify for §179D?
The types of potentially qualifying systems or system components include:
Geothermal heat pumps, high efficiency chillers (generally 0.4 kW/ton or lower).Chilled beams.Condensing boilers with efficiencies greater than 90%.Energy recovery units.Water side economizers.Cogeneration (not common, but advantageous if available).Instantaneous hot water heaters.Heat exchangers taking advantage of high efficiency boilers to provide service hot water.High efficiency motors with VFDs.If HVAC upgrades are being considered, a full system retrofit is almost always required.What are the considerations for the §179D Building Envelope?
Building Envelopes are the most difficult systems to predict for Section §179D. It is beneficial to keep these considerations in mind:
Building Envelopes are affected by many variables.Climate zone and building area have a large impact.Building geometry and orientation.Number of floors, surface area to volume ratio.Glazing percentages and R-values at roof and walls.Typical minimums seen on potentially qualifying buildings.Effective R-values of R-30 at roof and R-19 at walls.Double paned, Low-E glazing on windows.Envelope has the greatest impact in colder climates.Very high quality envelopes in hot climates might qualify, but impact is typically much lower in hot.Climates compared to colder climates.Envelope typically has little to no impact in temperate climates.What are other factors to consider under §179D building modeling?
Building Envelopes are the most difficult systems to predict for Section §179D. It is beneficial to keep these considerations in mind:
Solar panels and wind turbines are not considered when modeling for §179D deductions.Only building systems are considered in the model. Exterior site lighting is not included in the model.Miscellaneous (receptacle) loads are removed from the building energy usage.When only modeling a single system (i.e.; lighting, HVAC, or envelope) the other systems are placed at ASHRAE 90.1-2001 baselines.*Occupancy/Equipment schedules are from California Title 24.Who are the ideal candidates for §179D?
Designers (Architect, Engineer, Environmental Consultant, or Contractor) responsible for the design and specification of public (government-funded) building projects.