§179D Energy Efficient Commercial Building Tax Deduction

Credit: Steve Nanos, Walker Reid

Here is an updated and brief highlight of the exciting changes and opportunities in the new §179D program.

The major revisions to the §179D are the following:

  • Energy-efficient commercial buildings placed in service after January 1, 2023, will have the opportunity to qualify under the new IRA provisions with a potential increase in the §179D deduction up to a maximum of $5.00/SF. 
  • Designers of new and retrofitted energy-efficient commercial buildings, such as Architects, Engineers, Design Build Contractors, Energy Service Companies and Energy Performance Consultants and Contractors, can now request an allocation of the §179D Tax Deduction from “all tax-exempt” building owners or capital leases, including tribal governments” in addition to government-owned or leased buildings. Think hospitals, churches, foundations, universities and colleges, etc.
  • A special provision for an alternate performance-based qualification methodology has been added for retrofitting commercial buildings. Guidance on this has not yet been issued.
  • Commercial buildings will be able to be certified and qualified for 179D benefits more than once. Following the original certification, the properties may again be re-certified for new capital energy efficient improvements once every three years if privately owned and once every four years if government-owned. This should be of exceptional interest to your designers. Imagine that they designed an HVAC upgrade and qualified for the maximum benefit. Four years later, they upgrade a roof, or lighting, or even some HVAC systems that were not replaced the first time around. They may very well be able to qualify for benefits all over again.

 

  • ASHRAE standards:  
    • The IRS has just affirmed that ASHRAE 90.1-2007 shall remain the baseline standard for buildings/space “Placed-In-Service” through 2026.
    • For buildings/space Placed-In-Service beginning of 2027, ASHRAE 90.1-2019 shall be applied.     
  • Inflation Factor – Using 2021 as the baseline year, the above benefit values will be increased based upon IRS issued year-over-year inflation factors.

 

The qualification criteria changes that will be effective for properties placed in service on January 1st, 2023 through December 31st, 2032 are as follows:

 

  • For projects that are placed in service in 2023 or later and meet IRS “Beginning of Construction” criteria  prior to January 29, 2023″, energy reduction benefits will change as follows; a minimum energy cost savings of 25%, against the applicable ASHRAE standard will yield a §179D Tax Deduction of $2.50/SF plus for every 1% of additional reduction above 25%, it will provide an additional $0.10/SF of deduction up to a maximum of $5.00/SF for a 50% reduction against the ASHRAE standard.
  • For projects that are placed in service in 2023 or later “and meet the prevailing wage/apprentice requirements”, energy reduction benefits will change as follows; a minimum energy cost savings of 25% against the applicable ASHRAE standard will yield a §179D Tax Deduction of $2.50/SF, plus for every 1% of additional reduction above 25%, it will provide an additional $0.10/SF of deduction up to a maximum of $5.00/SF for a 50% reduction against the ASHRAE standard.
  • For buildings that “DO NOT MEET EITHER OF THE TWO CASES ABOVE”, energy reduction benefits will change as follows; a minimum energy cost savings of 25% against the applicable ASHRAE standard will yield a §179D Tax Deduction of $0.50/SF, plus, for every 1% of additional reduction above 25%, it will provide an additional $0.02/SF of deduction up to a maximum of $1.00/SF for a 50% reduction against the ASHRAE standard.
  • A new 179D qualified retrofit option has been added using actual pre and post-retrofit  “Energy Use Intensity” performance-based cost savings. Guidelines on how this program will work will be released in the future by the IRS after consulting with the DOE.

 

Key point #1: If you have buildings that meet the IRS criteria for “Beginning of Construction” prior to January 29, 2023, then you have the potential to achieve up to $5.00/SF deduction without concern of meeting any prevailing wage requirements. 

 

Key point #2: “Requalification” – please remember that, for previously certified buildings, you can potentially qualify for additional 179D deductions every 3 or 4 years assuming new energy efficient upgrades have been completed that meet the then current 179D standards.

 

Key Point #3: “Look Back”:  

  • For “privately owned”, previously built new or expansion/addition projects, we can look back as far as 2006, and benefits can be taken on a current tax return through an IRS Form 3115 – “Automatic Change of Accounting”.
  • Designers can only take benefits from allocated projects performed in previous years by amending a tax return for an open tax year.

Regarding prevailing wage/apprenticeship requirements, we do not yet see any requirement for the 179D certifier to verify that a project meets the IRS requirements. Unless additional guidance is issued, we believe that It would be up to the owner or designer to make a determination of prevailing wage qualification and then select the appropriate associated and certified 179D benefit. For instance, our 179D Certification Report will likely state two distinct technically certified 179D Deductions: one for non-prevailing wage and another for prevailing wage.

Please note that 179D is applicable for all commercial buildings, including office, education, retail, distribution, industrial, manufacturing and hospitality buildings and residential rental properties of more than 3 stories.

 

Please contact us if you want to discuss how this tax deduction can benefit your business by calling 843-790-8929

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