§179D Tax Deductions & 45L Tax Credits for Energy-Efficient Projects

Leverage your green building tax incentives.

Deducting your energy-efficient buildings can lead to significant cost savings. Source Advisors helps building owners, developers and designers take advantage of the EPAct §179D or §45L.

Was the §179D Tax Deduction Extended Through 2020?

Yes, In December of 2019, Congress extended the Energy-Efficient Commercial Building Deduction through December 31, 2020. This tax deduction provides a deduction of up to $1.80 per square foot for taxpayers meeting specific energy-efficient building requirements.

What is the §179D Tax Deduction for Energy-Efficient Buildings?

Commercial building owners and designers of public building projects that incorporate certain sustainable building components can qualify for the EPAct §179D 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.

The Energy Policy Act (EPAct) §179D tax deduction provides a deduction of up to $1.80 per square foot for the installation of systems that reduce the total energy and power costs by 50 percent 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 systems.

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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 $1.80/SF or a partial tax deduction of $0.60/SF for lighting, HVAC, and building envelope.

Which Buildings Qualify for the §179D Tax Deductions?

To qualify for a full or partial deduction, the energy-efficient building property must meet the following criteria. The building:

Must have been placed in service after December 31, 2005 and before January 1, 2021.

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.

If your design doesn’t meet the 50% energy savings, it could still qualify for a partial deduction if they meet the following criteria:

Lighting ≥ 25% = $0.60

HVAC ≥ 15% = $0.60

Envelope ≥ 10% = $0.60

25% to 40%=$0.30to 40.60

How Building Owners 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 government-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.

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.

Selecting Projects – Energy-Efficient Tax Deductions Criteria

Includes new construction, renovations and additions.

Non-profit buildings do not qualify.

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 Partner

Will consult with your CPA to determine your firm’s ability to use the deduction.

A free assessment of your projects

All modeling conducted in-house using IRS-approved software.

Complimentary service in drafting the Allocation Form and obtaining signatures.

Detailed documentation to support the deduction with complimentary audit support.

How EPAct §179D Tax Deduction
Works for Designers

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 Deduction

Must be paying federal income tax.

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

Deductions taken in excess of basis are exercised at a reduced amount.

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 Deduction Criteria

Projects in which your firm is primarily responsible for the design

Any government or municipal building located in the U.S. and substantially completed during the last 3 years’ filing periods can potentially qualify

Includes new construction, renovations and additions

Non-profit buildings do not qualify

Defining the Free Assessment for Designers

Upload Architectural & MEP 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.

The Allocation Form

Signature from a representative of the government entity must be obtained on an “allocation form.”

First-come, first-serve deduction – so time is of the essence.”

Deduction can be split among firms.

What to Expect with Source Advisors as Your Partner

Will consult with your CPA to determine your firm’s ability to use the deduction.

A free assessment of your projects.

All modeling conducted in-house using IRS-approved software.

Complimentary service in drafting the Allocation Form and obtaining signatures.

Detailed documentation to support the deduction with complimentary audit support.

Defining the Free Assessment through Source Advisors

Which buildings qualify as eligible deductions under Section §179D?

Building types that fall under the scope of ASHRAE Standard 90.1-2001 are eligible for Section §179D. This includes new construction or major renovations of: A designer may be an architect, engineer, contractor, environmental consultant or energy services provider.

Buildings used for commercial and industrial purposes.

Multi-family residential buildings (including dormitories) of four or more stories.

Unconditioned attached or detached parking garages.

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).

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.

Commercial Building Owners.

Do government-owned buildings qualify for §179D?

Yes, government-owned buildings at the local, state, and federal level might qualify for Section §179D. These buildings include: Schools, post offices, state universities, libraries, town halls, institutions, government offices, courthouses, military bases, airports, and transportation facilities.

Have a question about your potential qualification?

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 percent or more. Have questions regarding your eligibility?
Is §179D available for 2020?
Yes. Section §179D has been extended through December 31, 2020. With tax deadlines approaching, find out today if you qualify for this energy-efficient tax deduction. Use our free qualifying tool.
Do LED lights qualify for §179D tax credit?
Yes, according to The Energy Policy Act of 2005, LED lighting qualifies for the §179D tax deduction. The tax deduction varies linearly from $0.30 per square foot at 25% lighting power density reduction (LPD) to $0.60 per square foot at 40% lighting power density reduction (LPD). The LPD reduction is determined by comparing with ASHRAE 90.1 standards. For warehouses, this requirement increases to a 50% LPD reduction.

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 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 §179. 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 §179. It is beneficial to keep these considerations in mind:

Solar panels and wind turbines are not considered when modeling for Section 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.

§45L Energy-Efficient Home Credit

Section §45L is a little-known tax credit that offers developers a means to offset the costs associated with building energy-efficient single family or multifamily properties. The credit provides a dollar-for-dollar offset against taxes owed or paid in the tax year in which the property is sold or leased.

What is the §45L Tax Credit?

The Internal Revenue Code (IRC) Section §45L is a $2,000 per dwelling unit ($1,000 for manufactured homes) tax credit for each new energy-efficient home which is constructed by an eligible contractor and acquired by a person from the eligible contractor for use as a residence during the tax year. The credit can be taken on amended returns or carried forward up to 20 years.

The IRS requires that a §45L analysis be conducted by a certified third-party using IRS-approved modeling software. A dwelling unit must be certified to provide a level of heating and cooling energy consumption that is at least 50 percent below that of a comparable dwelling unit constructed in accordance with the standards of either the 2003 IECC or 2006 IECC (depending on the year sold or leased). It also must have building envelope component improvements that provide for a level of heating and cooling energy consumption that is at least 10 percent below that of a comparable dwelling unit.

Who Can Benefit from the §45L Tax Credit?

Homebuilders, single family or multifamily developers can benefit from the §45L Tax Credit.

Which Energy-Efficient Buildings Qualify for the §45L Tax Credit?

The following energy-efficient buildings qualify for the §45L tax credit:

Residential Condominiums

Apartment Buildings

Affordable Housing

Residential Buildings Undergoing Remodeling

Student Housing

Assisted Living Facilities

The Source Advisors Approach to Claiming the §45L Tax Credit

Phase I – A complimentary review of the property which includes detailed engineering takeoffs and modeling with IRS approved software.

Phase II – A field test to confirm that the property qualifies per IRS and IECC guidelines.

Tax Forms and Certifications – All required forms and certifications to be filed with the tax return.

Fees – Based on the number of units that actually qualify for the credit

Our §45L team includes tax and engineering professionals who are certified to perform §45L analyses and use IRS-approved software. Our team also includes former Big Four CPAs, a certified energy rater, and a former IRS tax attorney with in-depth experience in sampling protocol. The §45L tax credit can provide significant tax savings for developers with large-scale projects – Our approach is designed to make exploring the credit virtually risk-free.

Example of Potential §45L Tax Credits