The 179D tax deduction offers a powerful financial incentive for installing qualifying building systems that reduce energy consumption. Energy-efficient construction projects that meet specific energy efficiency standards are ideal candidates for the 179D deduction. Also, energy efficient retrofits or rehabs of older buildings also qualify for the deduction. The rules even provide a financial incentive to tax-exempt organizations looking to make their facilities more energy efficient.
The 179D tax deduction has been in effect since January 1, 2006. It was made permanent in 2021. Recent updates to the tax law have expanded the scope and benefit of the deduction.
As of 2024, the 179D deduction is as high as $5.65 per square foot, depending on the facts and circumstances of the project.
Overview of the 179D Tax Deduction
The 179D tax deduction is a federal incentive designed to promote energy efficiency in commercial buildings. This deduction rewards qualifying building owners and eligible designers for making energy-efficient improvements. As part of the Energy-Efficient Commercial Building Tax Deduction, the 179D deduction is available for energy-efficient commercial building property (EECBP). EECBP includes critical components such as interior lighting systems, the building envelope, and mechanical systems. By encouraging the installation of these energy-efficient systems, the 179D tax deduction aims to reduce energy consumption and promote sustainable building practices.
The 179D tax deduction is not just a financial benefit but also an environmental one. By promoting energy efficiency, it contributes to reducing carbon footprints and supporting sustainability goals. The deduction encourages the use of cutting-edge technologies and innovative solutions to meet energy efficiency standards, ultimately driving advancements in building design and construction.
Moreover, the deduction’s benefits extend beyond immediate tax savings. Energy-efficient buildings often enjoy lower operating costs due to reduced energy and power costs, leading to long-term financial advantages for building owners. These savings can be particularly significant for large commercial buildings that consume substantial amounts of energy.
Additionally, the 179D deduction can enhance the marketability of properties. Buildings that meet high energy efficiency standards are often more attractive to tenants and buyers who prioritize sustainability. This can lead to higher occupancy rates and potentially increased property values.
Eligibility for the Section 179D Deduction for Energy Efficient Commercial Buildings
Here is a list of who may benefit from the 179D deduction:
- Commercial building owners and owners of residential buildings that are at least four stories tall
- Governmental entities, tax-exempt organizations, Indian tribal governments and Alaska Native corporations
- Architects, MEP firms (mechanical, engineering and plumbing) and design-build contractors
- Real estate investment trusts (REITs) and their shareholders
Governmental and other tax exempt entities benefit from 179D by allocating the cost of the energy efficient portion of the project to the building designers, who may benefit from the additional tax deductions. The allocation may be used to negotiate pricing incentives on the construction project. Governmental and tax exempt organizations with a substantial amount of real estate, such as universities, hospitals, and religious organizations, may find the allocation of deductions to building designers to be particularly beneficial.
Understanding the Allocation Process
The allocation process involves assigning the tax deduction to the person primarily responsible for designing the energy-efficient improvements. This can include architects, engineers, and other design professionals. By doing so, these professionals are incentivized to incorporate energy-efficient systems into their designs, thereby promoting sustainable building practices.
The allocation must be documented through an allocation letter, which outlines the details of the project and the deduction being allocated. This letter is crucial for ensuring compliance with the Internal Revenue Code and must be signed by an authorized representative of the tax-exempt entity.
Benefits for Tax-Exempt Entities
For tax-exempt entities such as government-owned buildings and certain non-profit organizations, the 179D deduction offers a unique opportunity to improve their facilities without directly benefiting from the tax deduction. By allocating the deduction to the design team, these entities can often negotiate better terms for their projects, reducing overall construction expenditures. This is especially valuable for entities with large portfolios of buildings, as the cumulative savings can be significant. Moreover, by investing in energy-efficient improvements, these organizations can achieve long-term cost savings through reduced energy and power costs, further enhancing their financial sustainability.
Expanding Opportunities for Energy Efficiency
The 179D deduction is part of a broader movement towards energy efficiency and sustainability in the built environment. By encouraging the adoption of energy-efficient technologies and practices, the deduction supports the goals of the Inflation Reduction Act and other initiatives aimed at reducing carbon emissions. Building owners and designers are encouraged to explore all available incentives, including those offered at the state and local levels, to maximize their energy savings and financial benefits.
Components that Qualify for the Section 179D Deduction: Building Envelope
To qualify for Section 179D deductions, expenses must be for energy-efficient components. By reducing energy and power costs, building owners can achieve substantial tax savings. Qualifying components must be installed as part of the:
- Interior lighting systems (exterior lighting does not qualify)
- Heating, cooling, ventilation (HVAC) and hot water systems
- Building envelope (such as windows and roofing)
Note that taxpayers with these expenses must get a certification from a qualified engineering firm in order to qualify for Section 179D deductions.
Benefits of the 179D Tax Deduction
The 179D tax deduction offers several significant benefits to building owners and designers. One of the primary advantages is the potential tax deduction of up to $5.00 per square foot for qualifying energy-efficient improvements. This can result in substantial tax savings, making energy-efficient upgrades more financially attractive. The deduction is applicable to both new construction projects and retrofits of existing buildings, providing flexibility for various types of projects. Additionally, the deduction can be allocated to the primary designer of the energy-efficient improvements, offering a valuable incentive for architects, engineers, and builders who specialize in energy-efficient systems and buildings.
Enhanced Energy Efficiency and Sustainability
Beyond the immediate financial benefits, the 179D deduction promotes enhanced energy efficiency and sustainability. By encouraging the adoption of energy-efficient technologies, building owners can significantly reduce their total annual energy consumption. This not only leads to lower energy bills but also contributes to a reduction in the building’s carbon footprint.
Long-Term Cost Savings and Increased Property Value
Energy-efficient improvements can lead to long-term cost savings by minimizing energy and power costs. These savings can be particularly impactful for large commercial buildings that consume significant amounts of energy. Furthermore, properties that meet high energy efficiency standards often have increased marketability and property value. Tenants and buyers who prioritize sustainability may be more inclined to choose these properties, resulting in higher occupancy rates and potentially higher rental or sale prices.
Collaborative Opportunities for Stakeholders
The 179D deduction fosters collaboration among various stakeholders in the construction industry. Architects, engineers, and contractors are encouraged to work together to design and implement energy-efficient systems. This holistic approach can lead to more innovative and effective solutions, benefiting all parties involved. By involving these professionals early in the design process, projects can achieve greater energy efficiency and compliance with energy efficiency standards.
Supporting Broader Environmental Goals
The 179D deduction aligns with broader environmental goals, such as those outlined in the Inflation Reduction Act. By incentivizing energy efficiency, the deduction supports efforts to reduce carbon emissions and combat climate change. Building owners and designers are encouraged to explore all available incentives at the federal, state, and local levels to maximize their energy savings and contribute to a more sustainable future.
Next Steps for Section 179D Deductions
Building owners who have incurred energy reduction expenses are welcome to give us a call to discuss the mechanics of Section 179D deductions. We will be happy to do a cost/benefit analysis for you to determine the potential impact of 179D. The Inflation Reduction Act has further expanded these incentives, making them more accessible to a broader range of organizations.
We do the same for architectural, engineering, and design-build firms that are hired for projects with energy reduction components.
Steps to Maximize 179D Benefits
- Consultation and Assessment: Begin by consulting with tax professionals and energy efficiency experts to assess your eligibility for the 179D deduction. This initial step is crucial for understanding the potential tax savings and how they can be applied to your specific project.
- Engage Qualified Professionals: Work with architects, engineers, and design-build firms experienced in energy-efficient projects. These professionals can help design and implement systems that meet the energy efficiency standards required for the 179D deduction.
- Documentation and Compliance: Ensure all necessary documentation, including the allocation letter, is completed accurately and in compliance with the Internal Revenue Code. Proper documentation is essential for claiming the deduction and avoiding any potential issues.
- Leverage Additional Incentives: Explore other available incentives at the federal, state, and local levels. Combining the 179D deduction with other programs can maximize your financial benefits and support your organization’s sustainability goals.
- Monitor and Optimize: After implementing energy-efficient improvements, continuously monitor energy consumption and performance. This ongoing evaluation can help identify further opportunities for energy savings and efficiency enhancements.
By following these steps, building owners and investors can effectively navigate the 179D deduction process, ensuring they maximize the benefits and contribute to a more sustainable future.
Other Energy-Efficient Tax Incentives
In addition to the 179D tax deduction, there are several other energy-efficient tax incentives available to building owners and designers. These include the Energy-Efficient Home Credit, which provides tax benefits for energy-efficient residential buildings, and the Renewable Energy Production Tax Credit, which supports the generation of renewable energy.
Another valuable incentive is the Energy-Efficient Appliance Credit, which offers tax savings for the installation of energy-efficient appliances. By taking advantage of these additional incentives, building owners and designers can further reduce their tax liabilities while promoting energy efficiency and sustainability in their projects.
Beyond these, the Energy Star program offers certifications and rebates for products and practices that meet the highest energy efficiency standards. The Residential Energy Efficient Property Credit is another notable incentive, offering credits for the installation of solar panels, wind turbines, and geothermal heat pumps in residential properties. These credits not only reduce upfront costs but also encourage the adoption of renewable energy technologies.
Additionally, state and local governments often provide their own tax incentives and rebates for energy-efficient upgrades, which can be combined with federal benefits for even greater savings. Programs like the Weatherization Assistance Program (WAP) aim to improve energy efficiency in low-income households, reducing energy and power costs while enhancing living conditions.
By strategically utilizing these diverse incentives, building owners and designers can maximize their financial benefits while contributing to a more sustainable future. These initiatives not only foster energy savings but also support the broader goal of reducing carbon emissions and combating climate change.
_______________
For more information about the tax and accounting services we provide, visit our Home Page! The friendly CPAs, Enrolled Agents, tax professionals, and bookkeepers and accountants at Massey and Company CPA are here to assist you.
If you want my team and I to handle your tax matter for you, click here.
You are welcome to email me directly at gary.massey@masseyandcompanyCPA.com.
Massey and Company CPA is a boutique tax and accounting firm serving individuals and small businesses in Atlanta, Chicago and throughout the country. Our services include tax return preparation, tax planning for businesses and individuals, estates and trusts, IRS tax problem resolution, IRS audits, sales taxes, small business accounting, and bookkeeping clean up services.
Check out our 5-Star Google reviews here!
