Building owners and designers seeking ways to enhance energy efficiency while reducing tax liabilities should be aware of the Energy Efficient Commercial Buildings Deduction (179D deduction). This tax incentive allows eligible taxpayers to claim a deduction for installing qualified energy-efficient commercial building property (EECBP) or energy-efficient commercial building retrofit property (EEBRP).
The Inflation Reduction Act of 2022 expanded this deduction, increasing the benefits for projects that achieve greater energy savings and meet prevailing wage and apprenticeship requirements.
Who Qualifies
As of January 1, 2023, the deduction is available to a broader range of taxpayers, including:
- Owners of qualified commercial buildings
- Designers of EECBP and EEBRP installed in buildings owned by certain tax-exempt entities, such as federal, state, and local governments, Indian tribal governments, Alaska Native Corporations, and other nonprofit organizations.
Eligible Buildings
To claim the deduction, the property must be installed in a U.S.-based commercial building and meet certain criteria set by the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) and the Illuminating Engineering Society of North America (IES). The improvements must be eligible for depreciation or amortization and be part of one or more of the following systems:
- Interior lighting systems
- Heating, cooling, ventilation, and hot water systems
- Building envelope (roofing, insulation, doors, and windows that impact energy use)
For EECBP, the installation must be part of a certified plan to reduce total annual energy and power costs by at least 25% compared to a reference building meeting ASHRAE’s minimum standards.
EEBRP is eligible when installed in a qualified building, meaning a U.S.-based commercial structure placed in service at least five years before the retrofit plan’s implementation. The retrofit property must also be eligible for depreciation or amortization and meet specific energy-saving criteria.
179D Deduction for 2025
For tax years beginning in 2025, the maximum deduction varies based on the level of energy savings achieved:
- Base deduction: $0.58 per square foot, increased by $0.02 for each percentage point of energy cost reduction beyond 25%, up to a maximum of $1.16 per square foot.
- Increased deduction: For properties meeting additional energy efficiency requirements, the deduction starts at $2.90 per square foot, increasing by $0.12 per percentage point beyond 25%, up to a maximum of $5.81 per square foot.
A key limitation to consider is that deductions taken in the previous three years (or four years for allocated deductions) will reduce the maximum amount available in the current tax year.
Prevailing Wage and Apprenticeship Standards
A significant enhancement to the 179D deduction took effect in 2023. If projects meet prevailing wage and apprenticeship requirements, the maximum deduction amount increases fivefold per square foot. This incentivizes businesses to ensure fair wages and workforce development while achieving energy efficiency.
ASHRAE Standards and Compliance
The ASHRAE standard used for measuring energy savings depends on when construction begins:
- For buildings that begin construction on or after January 1, 2023, with energy-efficient property placed in service on or after January 1, 2027, the applicable standard is ASHRAE Standard 90.1-2019.
- For projects that began construction before January 1, 2023, or placed in service before January 1, 2027, the applicable standard remains ASHRAE Standard 90.1-2007.
These standards establish the baseline for determining energy cost reductions and ensuring compliance with the 179D requirements.
Maximizing Your Tax Benefits
The expanded 179D deduction offers a substantial financial incentive for businesses and tax-exempt entities investing in energy-efficient improvements. Whether you’re an owner of a commercial building or a designer working on a tax-exempt project, understanding the eligibility requirements and ensuring compliance with ASHRAE standards can help you maximize the deduction.
If you have questions about how to claim the Energy Efficient Commercial Buildings Deduction, contact a Stephano Slack tax manager or partner at 610-687-1600 or email [email protected].
Author Robert Radzinski, CPA, Manager, manages tax compliance for businesses and high net worth individuals. Rob can be contacted at 610-687-1600 or [email protected].
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