Your Essential Guide to the 179D Tax Deduction

Guide to the 179D Tax Deduction

If you’re a commercial builder or you own a commercial property (or a residential building 4 stories or taller), it’s important that you stay up to date on the latest requirements for the 179D tax deduction (part of saving with the Inflation Reduction Act). This tax deduction, geared toward making commercial buildings more energy efficient, may be something you can begin taking advantage of today.

In this article, we will show you exactly what this tax deduction is and what requirements need to be met to qualify.

What is the 179D Tax Deduction?

Named after section 179D of the Internal Revenue Code, the 179D tax deduction was designed as an incentive for designers and builders to develop and build commercial buildings that are energy efficient. This incentive can be applied to both new commercial constructions or to existing buildings that have been significantly rehabilitated to be more energy efficient.

This program’s primary objective is to drive commercial building owners to make renovations that will reduce energy use or to incentivize designers to design buildings that will be more energy efficient.

After the passage of the Energy Policy Act of 2005, this tax deduction also extends to building owners who invest in qualified energy-efficient building improvements. If the commercial building is owned by the government, the deduction can extend to those primarily responsible for designing the improvements.

This tax deduction was made permanent with the Consolidated Appropriations Act of 2021. This act also updated standards that need to be met to qualify as well as provide an inflation adjustment for any property that was in service after December 31, 2020.

New Updates to the 179D Deduction for 2023

New updates for the 179D deduction went into effect in January of 2023. These updates included an increase in the tax deduction, new eligibility for real estate investment trusts (REITs), and more. Qualified entities include:

  • Federal government
  • State or local government
  • Indian tribal government
  • Other tax-exempt organizations including not-for-profit hospitals

These updates included an increase in the tax deduction, new eligibility for real estate investment trusts (REITs), and more.”

What Building Types are Eligible for the Tax Deduction?

Any type of commercial building is eligible, even if owned by a non-profit entity. This includes residential buildings four stories and taller. It’s important to know that the residential 45L tax credit can be claimed in combination with the 179D as there is no longer a height restriction for residential buildings to claim the 45L. Learn more about the 45L tax credit.

Who is Eligible to Receive the Tax Deduction Credit?

Not everyone involved in a building project is eligible to receive this tax deduction. Primarily, those who are eligible for the deduction are taxpayers who are responsible for the ground-up construction of commercial buildings or building owners who invest in energy-efficient improvements. These can include:

Architects and Engineers

As primary designers of a building’s technical specifications, architects and engineers typically qualify for this tax deduction through the design of a property’s building envelope, heating, ventilation, air conditioning (HVAC) system, and indoor and outdoor lighting systems.

Construction Contractors

Contractors can qualify if they have input in the design or must take part in the design of the building based on their contract.

Taxpaying Designers of Tax-Exempt Entities

A lot of the largest commercial buildings are owned by tax-exempt entities such as state and federal governments, tribal governments, the military, K-12 schools, not-for-profit hospitals, and universities. While these entities do not qualify for the tax deduction since they are tax-exempt, the incentive can be allocated to the taxpaying designer who built or renovated the building for energy efficiency.

Building Owners and Select Tenants

Owners of existing commercial buildings qualify for this tax deduction if they are responsible for the installation of qualifying systems that make a building more energy efficient. In addition, tenants of commercial buildings may also qualify if they make construction expenditures that are geared toward energy efficiency.

The residential 45L credit can be claimed in combination with the 179D as there is no longer a height restriction for residential buildings to claim the 45L.

What are the Requirements?

In order to qualify for the 179D tax deduction, certain criteria must be met.

Qualifying owners can get a tax deduction of up to $1.88 per square foot on properties that were completed before January 1, 2023. New or existing renovated buildings completed after January 1, 2023, are eligible for deductions of up to $5.00 per square foot with the installation of the following components of energy efficiency:

  1. Interior lighting
  2. Building envelope
  3. Energy-reduced HVAC or hot water systems

More incentives are available to more organizations with the update of a sliding scale deduction. For the installation of energy-reducing components, a sliding scale is used. With reduction costs of 25% to 50%, tax deductions of $2.50 per square foot to $5.00 per square foot can be utilized. These energy savings are in comparison to buildings that meet the minimum requirements set by the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) 90.1 Standard. These cost savings must be calculated by software that has been approved by the Internal Revenue Service.

Who Will Benefit from the 179D Tax Deduction?

The obvious benefit of the 179D Tax Deduction initially goes to building owners. In being given an opportunity to defray the cost of energy-efficient design and building materials, owners are more likely to either build new buildings that are greener or transform existing structures into more energy-efficient properties. In time, this will also benefit owners through reduced utility costs.

In the case of tax-exempt entities such as federal, state and local, or tribal governments, architects, engineers, and contractors who work on new construction or renovation projects are eligible to claim the 179D deduction.

Want more information? We’ve developed an Inflation Reduction Act (IRA) Frequently Asked Questions page just for this!

Learn about the 25C Tax Credit, also part of the Inflation Reduction Act.

Are you a commercial building owner or a developer who specializes in commercial and/or mid/high-rise residential properties?

It’s time to know the ins and outs of how to make the 179D tax deduction benefit you. Download our FREE eBook: “How to Get the Most From the Inflation Reduction Act to see how you can take advantage of this tax deduction and put money back in your pocket while making environmentally conscious building decisions.

Need further help? While our Inflation Reduction Act work applies to residential projects seeking 45L (including multi-family of any height). For commercial buildings or residential buildings 4 stories and above, we can refer you to a trusted partner who can help you with that.

The green building experts at Green Insight would love to partner with you on future building or renovation projects that you’d like to make more energy efficient. Contact us today to get started!