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Section 179D provides added tax deduction for energy-efficient buildings

February 8, 2022 Article 2 min read
Lawrence Knutson Jonathan Winterkorn Jeremy Sompels
Section 179D, the energy-efficient commercial buildings deduction, allows additional first-year cost recovery for amounts spent on interior lighting, building envelope, and HVAC systems that exceed certain industry standards for energy efficiency. Here’s what owners and designers need to know.
View of scaffolding and skyscrapers at night.The Internal Revenue Code Section 179D energy-efficient commercial buildings deduction allows owners of commercial properties to claim an additional deduction in the year that certain energy-saving systems are placed in service. Qualifying taxpayers can claim a 179D expense of up to $1.80 per square foot of the property in which energy-efficient lighting, building envelope, and HVAC systems are installed if the systems meet or exceed a 50% savings in energy compared to a “standard building” described in Reference Standard 90.1 of the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE Standard 90.1).

In some cases, architects and engineers who design energy-efficient systems for federal, state, and local governments can claim the deduction if the government entity that owns the property can’t benefit from the deduction.

What properties are eligible for a 179D deduction?

The 179D deduction is available for energy-efficient systems that are installed on U.S.-based:

  • Commercial buildings of any type
  • Residential buildings of four stories or more
  • Government-owned buildings
  • Parking garages

Taxpayers rely on independent engineers that use software approved by the Department of Energy to document that energy and power cost savings meet the ASHRAE requirements. Field inspections must be performed in accordance with National Renewable Energy Laboratory guidelines after the property has been placed in service. Engineers that conduct these inspections and issue the certifications must be licensed in the jurisdiction of the qualifying building. The taxpayer is responsible for maintaining the certification documents in its records to support any deduction claimed.

Taxpayers rely on independent engineers that use software approved by the Department of Energy to document that energy and power cost savings meet the ASHRAE requirements.

179D and government-owned buildings

Sec. 179D includes a relatively unusual provision designed to encourage architects, engineers, and builders to design energy-efficient government buildings. A government entity that installs lighting, building envelope, or HVAC systems that would otherwise qualify for a 179D deduction can allocate the deduction to the parties involved in the design of the energy-efficient systems.

In addition to the documentation that supports the certification of the property, any firm claiming the deduction for government property would also need to keep an “allocation letter” on file from the government entity that verifies:

  • The party’s involvement with the project.
  • The cost of the property installed.
  • The year it was placed in service.
  • The amount of the 179D deduction.

The rules aren’t specific about who can issue an allocation letter, but they do require that the government official be employed at a level that gives them knowledge of which firms provided different services on the project and how the deduction should be allocated.

Section 179D now permanent; will be adjusted for inflation

The energy-efficient commercial buildings deduction had been subject to expiration and temporary extensions since its original enactment, but the Consolidated Appropriations Act of 2021 made it a permanent part of the Internal Revenue Code. In addition to removing the uncertainty about whether the provision would be renewed, the new law also indexed the $1.80 per-square-foot amount for inflation. These changes should help those planning to install property that could qualify for the 179D deduction in the years ahead.

To learn more about how your business might qualify for the 179D energy-efficient commercial buildings deduction, please contact your Plante Moran advisor.

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