Breaking It Down: what the 179D commercial buildings energy-efficiency tax deduction means
New legislation allows building owners to expense more of their cost for improvements that increase energy efficiency.
179D Deduction- Energy Efficient Commercial Buildings Deduction (also known as the EPAct Deduction) enables building owners of commercial buildings at any height and residential buildings that are four stories or more above grade to expense up to $1.80 per square foot of the cost of improvements that increase energy efficiency.
The incentive which had previously expired on December 31, 2017, was initially extended through December 31, 2020, and is now pertinently extended. The 179D deduction allows taxpayers to claim a deduction for installing qualifying systems and buildings. If the systems or building is owned by the federal, state or local government the 179D tax deduction may be taken by the entity primarily responsible for the design of the system. An allocation for the 179D deduction from the government entity to the designer of the system or building must be given in writing and will be treated as satisfying the requirements of IRS notice 2006-52; deduction for energy efficient commercial buildings. The following projects may qualify for 179D:
- Newly constructed buildings
- Additions to existing buildings (HVAC, lighting, or building envelope upgrades)
- Renovations in existing buildings
These deductions are taken in the year in which the systems and or buildings are placed in service (acceptance based on certificate of occupancy). For commercial buildings, IRS 2011-14 allows taxpayers to claim EPAct deduction on upcoming return for previous tax years. For government projects, the designer must amend taxes (only three tax years).
The tax deduction encompasses three categories of a facility: interior lighting, building envelope, and or heating, cooling, ventilation, and hot water systems that reduce the buildings total energy and power cost in comparison to a building minimum requirement set by the American Society of Heating, Refrigeration, and Air-Conditioning Engineers (ASHRAE). This building requirement is the 90.1 ASHRAE Standard Baseline Version determined by project completion date.
A minimum threshold must be met in order for a building or building system to qualify. Once qualified, energy savings are allocated on the incentive scale, up to $0.60 per square foot for each measure. Here are two ways a building or building systems can qualify for the 179D deduction:
- Up to $0.60 per square foot for each building system that exceeds energy reduction thresholds compared to the applicable ASHRAE standards: HVAC, lighting, and building envelope.
- $1.80 per square foot for a total energy use reduction of 50 percent or more compared to the applicable ASHRAE standards.
To meet the IRS filing and reporting requirements, a detailed energy engineering and CPA certified report is required as part of the filing. The model must show energy use reduction compared to a reference building under the applicable ASHRAE standard. The property must undergo a physical inspection by a licensed engineer or contractor.