The 179D Deduction was passed by Congress to encourage more energy-efficient building practices. The incentive was first introduced in 2006 and received a major boost with the Inflation Reduction Act of 2022.
Energy efficiency for this incentive is directly attributable to three main systems in the building.
Energy efficiency is determined by comparing the applicable building to the ASHRAE standard 90.1 in effect for the tax year the applicable building was constructed. Buildings at least 25% and up to 50% more energy efficient than the ASHRAE will receive the benefit.
The deduction the building receives is calculated on one of two sliding scales. The scale used depends on if the construction of the building paid prevailing wages and followed the apprenticeship programs for contractors and subcontracts as defined by subchapter IV of chapter 31 of title 40 of the United States Code.
Scale 1 is used if prevailing wage and apprenticeship requirements were NOT met:
Scale 2 is used if prevailing wage and apprenticeship requirements ARE met:
*Note that the deductions above also have inflation adjustments each year so will be slightly higher depending on your fact pattern.
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Section 179D is a tax deduction for energy-efficient commercial buildings, allowing owners or designers of such buildings to claim a deduction for installing energy-efficient systems.
Owners of commercial buildings and certain residential buildings over four stories are eligible. Designers (architects, engineers, contractors) of energy-efficient systems of government-owned or non-profit owned buildings can also claim the deduction.
The maximum deduction is $5.65 per square foot of the building, depending on the level of energy efficiency achieved and if the building paid prevailing wages to all of the contractors and subcontractors during construction.
Improvements to lighting systems, HVAC (heating, ventilation, and air conditioning) systems, and the building envelope (insulation, windows, etc.) can qualify.
The building must achieve a certain level of energy efficiency compared to a reference building defined by ASHRAE (American Society of Heating, Refrigerating and Air-Conditioning Engineers) standards. A certified third-party professional must conduct an energy analysis and provide certification.
Yes, both newly constructed buildings and existing buildings that undergo energy-efficient retrofits can qualify.
Necessary documentation includes the energy analysis report, certification from a qualified professional along with IRS Form 7205, and allocation letters (for designers of government buildings).
Section 179D can be combined with other incentives, such as cost segregation, utility rebates and other federal or state energy efficiency programs, to maximize overall savings.
Schedule a call with us today to discuss your property. We will provide a complimentary estimate of benefit to project your potential savings.
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