Section 179D Energy Efficient Commercial Property Tax Credit Service

Section 179D Energy Efficient Commercial Property Tax Credit Service

Constructing, improving, or designing buildings to be energy efficient may help you meet sustainability goals and could also increase your cash flow and reduce federal income tax liability.

Claiming the Internal Revenue Code (IRC) Section 179D tax deduction requires compliance with various tax code and industry standards, rigorous energy modeling, and third-party certification by a qualified individual.

Confidently pursue this energy incentive and put money back into your business with guidance and certification from our professionals.

Deduction Overview

For tax years 2022 and prior, the Section 179D deduction allows a deduction of up to $1.88 per square foot for taxpayers—or the designer if the building is government-owned—that improve the efficiency, above certain thresholds, of their commercial buildings and residential rental buildings that are four stories high or more.

Beginning in tax year 2023, the Section 179D deduction increased to up to $5.00 per square foot. Additionally, the deduction expanded and allows for tax-exempt entities including government-owned, not-for-profit organizations, churches and other religious organizations, Tribal organizations, and not-for-profit schools and universities to allocate deductions to eligible designers.

Section 179D tax deduction is a permanent part of the tax code and doesn’t expire.

To What Type of Buildings Does the Section 179D Tax Deduction Apply?

The deduction applies to newly constructed or improved buildings that exceed Standard 90.1 requirements published by the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) and the Illuminating Engineering Society of North America.

The proper standard used to evaluate building performance differs based upon when the building was placed in service.

The provision applies to reduced energy costs in three areas:

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

Who Can Claim the Section 179D Tax Deduction?

The following taxpayers are eligible to claim the energy efficient building deduction:

• Owners and tenants of commercial buildings who built or installed improvements
• Owners of four-story or greater residential buildings who built or installed improvements
• Designers of government-owned buildings, such as architects, engineers, contractors, or energy service providers
• Designers of buildings owned by not-for-profit organizations, churches or other religious organizations, Tribal organizations, and not-for-profit schools and universities beginning with tax year 2023
• Real estate investment trusts (REITs) constructing eligible buildings beginning with tax year 2023

Businesses in many industries can benefit from the deduction, but it can prove especially valuable for the following industries:

• Professional services
• Health care
• Hospitality
• Manufacturing
• Real estate
• Retail

How Is the Section 179D Tax Deduction Calculated?

The deduction is calculated based on the square footage of these improvements. The larger the building, the greater the potential for significant tax deductions.

Depending on the level of energy efficiency achieved, potential deductions can include the following based upon when the building was placed in service:

During tax year 2022 and prior:

• Maximum deduction is $1.80—inflation adjusted up to $1.82 and $1.88 for tax years 2021 and 2022, respectively—per square foot for a 50% reduction in total annual energy and power costs with respect to the combined usage of all three systems
• Partial deduction is $0.60—inflation adjusted up to $0.61 and $0.63 for tax years 2021 and 2022, respectively—per square foot, per system, for reductions of energy consumption related to the interior lighting, HVAC, or building envelope

During tax year 2023 and beyond:

• Maximum deduction is $5.00—inflation adjusted yearly starting in tax year 2023—per square foot for a 50% reduction in total annual energy and power costs with respect to the combined usage of all three systems if prevailing wage and apprenticeship requirements are met or construction started prior to January 29, 2023.
• A sliding scale from $2.50 per square foot for energy savings of 25% up to $5.00 per square foot for energy savings of 50% or greater if prevailing wage and apprenticeship requirements are met or construction started prior to January 29, 2023. These deduction rates are adjusted for inflation beginning in tax year 2023.
• A sliding scale from $0.50 per square foot for energy savings of 25% up to $1.00 per square foot for energy savings of 50% or greater if prevailing wage and apprenticeship requirements aren’t met. These deduction rates are adjusted for inflation beginning in tax year 2023.

Maximum Deductions Based on Building Size

Can You Claim Previous Improvements for the Section 179D Tax Deduction?

It’s not too late to claim deductions for improvements made in previous years as well. For commercial building owners, improvements made after January 1, 2006, are eligible, and available benefits can still be captured on a look-back basis.

Property owners can claim these deductions using an accounting method change when filing current-year tax returns without needing to amend previous returns.

For designers, benefits can be claimed for the current year and any open tax years, approximately three tax years back, by filing an amended tax return.

Engineering and Financial Expertise

To help you streamline the Section 179D energy efficient building tax incentive processes, our team features a range of professionals including professional engineers, CPAs, enrolled agents, and LEED-certified individuals specializing in energy-efficient buildings.

Guidance from our professionals has saved taxpayers millions of dollars through these deductions, and we offer support throughout the entire process.

The New Era of §179D Deduction

The recent updates under the Inflation Reduction Act (IRA) have expanded the scope of the §179D deduction, which incentivizes energy-efficient upgrades in commercial buildings. Previously focused on government buildings, this program now encompasses a wider range of tax-exempt entities, including:

• Universities and colleges
• Libraries
• Museums
• Religious institutions
• Non-profit organizations
• Tribal lands
• Hospitals

This expansion opens up exciting opportunities for these organizations to invest in energy-saving improvements while enjoying substantial financial rewards.

Why §179D Matters for Tax-Exempt Organizations

Cost Savings Through Increased Efficiency: Incorporating energy-efficient features such as advanced insulation, high-performance windows, and upgraded HVAC systems can lead to significant reductions in utility bills. These savings can be redirected towards fulfilling the core missions of these organizations. Imagine a school district using saved funds for new educational programs or a library expanding its collection.

Unlocking Tax Benefits for Design Professionals: The tax deduction can be allocated to the architects, engineers, designers, and design-build contractors who work on these projects. This creates a win-win scenario: tax-exempt organizations gain access to valuable expertise and cost savings, while design professionals can claim a portion of the deduction to reduce their tax liability.

The 179D Study Process

To qualify for the 179D tax deduction, one needs to follow due process. Broadly there are two parts to the 179D study process.

Evaluation: In this part, you evaluate the building to determine if they qualify for 179D tax deduction. The building is also compared to the reference model for energy efficient qualifications under ASHRAE norms. This also involves a physical visit to the building by a licensed qualified third party in the state.

Documentation: There are two primary documents required for 179D tax deduction. Allocation letters confirming ownership of property, energy efficiency of the building and signed by authorized personnel are required for 179D tax deduction. Secondly, a report certifying the building qualifies for 179D along with an energy model that shows energy reduction compared to ASHRAE standards.

1. Discovery & Assessment

Project List – Identify Buildings Secure Allocation Letter(s) Obtain Documentation

2. Qualitative & Quantitative Analysis

Energy Modeling, Field Inspection, Certification, and Deliver Final Deduction Numbers for Filing

3. Reporting

Document Cataloging, Summary Drafting, and Final Report