As part of the Consolidated Appropriations Acts, 2021 signed into law on December 27, 2020, the energy efficient commercial buildings deduction (IRC Sec. 179D) is now made permanent.
What Is IRC Sec. 179D?
Internal Revenue Code (IRC) Sec. 179D is a tax incentive that provides building owners and eligible designers/builders the opportunity to claim a tax deduction of up to $1.80 per square foot for installing qualifying energy efficient systems and buildings. Tenants may be eligible if they make the construction expenditures. The tax deduction applies to both new construction and retrofits. Qualified buildings include:
• Commercial buildings, including warehouses and parking garages;
• Multifamily properties with four stories or more; and
• Government-owned buildings, such as public universities, libraries, etc.
To qualify, the energy efficient property must reduce the energy and power costs of a building located in the US by 50% or more in comparison to the minimum requirements of ASHRAE Standard 90.1 of the time. If the 50% target saving is not met, the provision allows partial deduction of $0.60 per square foot for each of the following components:
• Interior lighting systems meeting a 25% saving;
• Heating, cooling, ventilation, and hot water systems meeting a 15% saving; and
• Building envelope meeting a 10% saving.
The deduction cannot exceed the cost of the qualifying property. There are also alternative guidance for partially qualifying property of lighting systems.
If a deduction is allowed under IRC Sec. 179D with respect to the energy efficient property, the property’s basis will be reduced by the amount of allowed deductions.
Illustration of Potential Tax Saving from IRC Sec. 179D
Multiple energy projects covering lighting, HVAC, and building envelope costing $19,500,000 is completed for a commercial building with 600,000 square feet. Typically, the improvement is depreciated over 39 years and provides annual depreciation of $50,000. However, with the qualified IRC Sec. 179D deduction, additional depreciation can be taken in the year that the energy efficient projects are placed into service, resulting in significant benefit to the taxpayers:
600,000 sq ft x $1.80 benefit rate = $1,080,000
The basis of the energy efficient property will reduce by $1,080,000, and the remaining basis of $18,420,000 will be depreciated over 39 years.
How to Apply
One cannot just do an energy efficiency project and claim the deduction. In order to qualify under 179D, energy efficiency project(s) must receive proper certification by licensed engineers as meeting appropriate energy efficiency standards. The qualified individuals will certify perform field inspections in accordance with guidelines from the National Renewable Energy Laboratory (NREL) and calculate the energy and power cost savings with software approved by the US Dept of Energy.
Taxpaying building owners can take the IRC Sec 179D deduction in the current tax year if they receive the proper certification and/or allocation letter at tax filing time. The renewal of the rule allows a building owner to take the deduction retroactively for energy efficient projects completed in prior years. Such a situation will require eligible tax payers to amend their prior tax returns in order to take the deduction.
The $1.80 per square foot deduction will rise with inflation in future years. Therefore, this rule does not have to be reauthorized every year or two. It is permanent.
Non-Tax Paying Buildings
For energy efficient property installed on or in buildings owned by an entity that does not pay taxes, such as federal, state, or local governments or not-for-profits, the 179D deduction can be allocated to an external person primarily responsible for the project’s design, such as designers, architects, engineers, contractors, or energy consultants. The person needs to secure an appropriate allocation letter to transfer the benefit.
CCES has the technical experts to design, perform, and certify energy upgrades that would qualify for IRC Sec. 179D. CCES has successfully done such work in the past under the 179D deduction program. Contact us today at karell@CCESworld.com or at 914-584-6720.