What’s the 179D Tax Deduction, Who’s Eligible & How to Claim It

The 179D deduction is a federal tax benefit created as part of the Energy Policy Act of 2005. It allows commercial building owners, as well as architecture, engineering, and construction firms, (AEC), a tax deduction of up to $1.88 per square foot for buildings that meet certain energy efficiency requirements and were placed into service before 12/31/2022. For buildings placed into service after 12/31/2022, the deduction can be as high as $5.00 per square foot.

179D was a temporary incentive, but is now permanent, thanks to the Consolidated Appropriations Act of 2021. Now, commercial building owners and designers can start planning for future energy-efficient investments with the assurance that they will benefit from the 179D deduction in the long term.

If you have questions about the 179D Tax Deduction, read on. 

How Does the 179D Tax Deduction Work?

For government owned buildings placed into service before 12/31/2022, the 179D tax deduction is worth up to $1.88 per square foot of a building’s energy-efficient improvements. These improvements must be made to the building’s envelope, interior lighting, or heating, ventilation and air conditioning systems, reducing total annual energy costs by at least 50% compared to ASHRAE 90.1-2007 standards.

For buildings owned by a government or non-profit entity and placed into service on or after 1/1/2023, the 179D tax deduction is worth from $2.50 up to $5.00 per square foot of a building’s energy-efficient improvements. These improvements must also be made to the building’s envelope, interior lighting, or heating, ventilation and air conditioning systems, reducing total annual energy costs by at least 25% compared to ASHRAE 90.1-2007 standards.

The IRS requires that applicants conduct a certification process with a third party to verify their energy efficiency improvements are eligible. To qualify, the building must meet specific energy efficiency thresholds and adhere to certain standards. Sections 179D and 48C of the Internal Revenue Code outline the standards.

Benefits of the 179D Tax Deduction

The 179D Tax deduction offers a variety of benefits to commercial building owners and design professionals. These include:

Cost Savings

The most obvious benefit is the cost savings associated with the deduction. The 179D deduction can save commercial building owners and designers from $1.88 up to $5.00 per square foot on energy-efficient improvements and reduce their taxable income.

Long-Term Savings

The 179D deduction helps building owners save money in the long term, as well as designers benefit from tax savings in the short term, by incentivizing investments in energy-efficient infrastructure. By making these upgrades, they can benefit from the long-term cost savings associated with lower energy consumption.

The tax dollars it immediately saves can also be reinvested into future energy-efficient improvements or other areas of business, increasing net profit for AEC firms. 

Accessible Energy Efficiency

By reducing the cost of energy-efficient upgrades, 179D encourages building owners and designers to invest in efficient technology that might otherwise be too expensive. This makes sustainability more accessible and encourages AEC firms to design energy efficient buildings. 

Who Qualifies for 179D Deductions?

The 179D tax deduction applies to commercial building owners undertaking energy-efficiency improvements on their property. In cases where the building is publicly owned or operated by a non-tax-paying entity, the incentive gets passed on to the designer or builder involved in the project.

Architectural, engineering, and construction firms can receive the deduction. They must fulfill three main criteria to claim 179D:

Qualified Activity

The AEC firm should be directly involved in designing, developing, and implementing energy-efficient systems or a significant building envelope component. They need documented proof that they are substantially involved in the development of technical specifications for the energy efficient systems of the building.

Allocation Letter

Allocation letters are required when the tax incentives for projects completed for non-tax paying entities, such as government or non-profit organization owned buildings, are passed down to associated designers or engineers. This document is a legal agreement between the AEC firm and the building owner to ensure that the 179D deduction associated with the project is correctly allocated.

Meeting Certain Standards

The energy-efficiency improvements must meet specific standards to qualify for the tax deduction. These include ASHRAE 90.1-2007 building energy standards and any other applicable local or state energy efficiency codes. 3D Energy Modeling Analysis is used to determine the overall energy efficiency of a building and whether it meets the requirements.

What Types of Buildings Qualify for the 179D Tax Deduction?

The 179D tax deduction applies to most commercial buildings, including apartment complexes of 4 or more stories and any size of commercial building. Renovations, new construction projects, and retrofits can qualify. 

Examples of qualifying improvements include:

• Design of high-efficiency heating, cooling, and ventilation systems
• Upgrading lighting fixtures with energy-efficient models
• Upgrading energy-efficient windows and doors
• Insulating walls, ceilings, and floors
• Replacing inefficient equipment with more efficient models

Updates to 179D

Like all pieces of tax law, Section 179D is always subject to changes. The Inflation Reduction Act 2023 is just one example of recent updates to the incentive, which includes the following:

• Lowered minimum required savings in total annual energy and power cost from a 50% reduction to a 25% reduction
• Removed existing rules for partial certifications ($0.60 per square foot for each lighting, HVAC, and building envelope improvement)
• Removed the lifetime limit on deductions

The government has also stated that businesses that meet higher prevailing wage and apprenticeship requirements and achieve a 25% reduction in energy and power costs can claim a deduction of $2.50 per square foot. The deduction increases by $0.10 for each additional reduction percentage – up to a maximum deduction of $5.00 per square foot.

Claiming a 179D Tax Deduction

To claim the 179D deduction, a Section 179D compliance study (also known as a Section 179D Certification) must be performed by a qualified independent firm – like ABGi’s 179D deduction service – or an individual who specializes in energy engineering and meets the requirements laid out in Section 179D.

Does Claiming 179D Deductions Trigger an Audit?

No. Claiming the 179D deduction does not trigger an audit, although we highly recommend that businesses have all their documentation in order before filing a tax return to avoid any issues. Companies should keep all relevant documents, including the allocation letter and Section 179D certification letter, in case the IRS requests additional information.

Why ABGi?

ABGi is a professional services firm with decades of experience in energy engineering, building envelope science and tax incentives. Our team of professionals is well-versed in the complexities of Section 179D and can provide a comprehensive analysis of projects that qualify for the deduction. 

Reach out today to learn more about what we can do for you.