Section 179D Tax Deduction
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 codes 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.
The 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 on 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 on when the building was placed in service:
During the 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 for 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 for the combined usage of all three systems if prevailing wage and apprenticeship requirements are met or construction started before 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 before 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.
Financial Expertise
At EIAG, we excel in optimizing the Section 179D energy-efficient building tax incentive procedures. Our seasoned team comprises a diverse range of professionals, from professional engineers to enrolled agents and LEED-certified experts with a specialization in energy-efficient constructions.
With our expert guidance, taxpayers have saved millions of dollars through these deductions. We provide comprehensive support every step of the way, ensuring a seamless process for our clients.