About the Authors:
This content is contributed by Raymond Kumar and Jacob Goldman, Energy Tax Savers, Inc.
Raymond Kumar is a CPA and Manager at Energy Tax Savers, Inc. Jacob Goldman is the Vice President of Energy Tax Savers, Inc. Views expressed are those of the author/s. For questions, please reach out to [email protected] . Check out other posts on the topic of tax credits for the lighting industry.
Under the Energy Policy Act (EPAct) of 2005, the now permanent Section 179D allows for energy efficient investments in new and existing buildings to qualify for immediate tax deductions. Eligible projects include those related to interior lighting, HVAC, and building envelope.
Owners of commercial buildings can utilize the 179D deduction for building projects completed since January 1, 2006. The best opportunities for commercial building owners relate to new construction, as new construction facilities are typically built to more recent energy codes and have significant depreciable basis (which is required to utilize the deduction).
A unique provision under 179D relates to government buildings, as the firm(s) responsible for the energy efficient design can receive the tax deduction for Federal, State and Municipal building projects.
Eligible designers include: architects, engineers, design and build firms, energy service companies (ESCOs), and firms designing lighting, HVAC and envelope systems.
179D Deduction Updates Set for 2023
Several significant updates are expected to affect the 179D deduction in 2023. The Inflation Reduction Act of 2022 (signed into law on August 16, 2022) includes the following updates set to go into effect on January 1st, 2023:
New 179D Deduction Levels – for projects completed in calendar year 2022, the maximum 179D deduction level is $1.88 per square foot. Starting in 2023, two new deduction ranges will replace the current one – qualifying projects meeting prevailing wage and apprenticeship standards can qualify for a deduction between $2.50 and $5.00 per square foot, whereas projects not meeting these standards can qualify for a deduction between $0.50 and $1.00 per square foot.
Expanded Designer Deduction – design firms will now be able to utilize the 179D deduction on projects completed for not-for-profits and Tribal Government buildings. Examples of not-for-profit building types are non-profit hospitals, private schools and universities, and places of worship.
Deduction Reset – starting in 2023, a commercial building owner can take the maximum 179D deduction on their building every three years, and a designer can take the deduction on a particular government, not-for-profit or Tribal Government building every four years. Historically, the maximum 179D deduction was allowable only once over the life of the building.
Additionally, it is anticipated that the energy standards to qualify will be upgraded in 2023.
Currently, projects must be more efficient than ASHRAE 90.1-2007 by specified thresholds, but the Internal Revenue Service is expected to soon affirm a newer version of ASHRAE 90.1 (likely 90.1-2016), which would create a stricter standard for qualifying.
Increased 179D Deduction Levels for Energy Efficient Projects Meeting New Standards
|Building Square Footage||Minimum Deduction Level ($2.50 Per Square Foot)||Maximum Deduction Level ($5.00 Per Square Foot)|
|50,000||$ 125,000||$ 250,000|
|100,000||$ 250,000||$ 500,000|
|250,000||$ 625,000||$ 1,250,000|
|500,000||$ 1,250,000||$ 2,500,000|
|1,000,000||$ 2,500,000||$ 5,000,000|
Window Closing to Qualify Against ASHRAE 90.1-2007 Standard
With the IRS expected to upgrade the 179D qualifying standards, companies should weigh the option of accelerating projects to complete in 2022 and take advantage of the existing qualifying standards. Additionally, projects not meeting the prevailing wage and apprenticeship standards will be limited to a maximum deduction of $1.00 per square foot, lower than the 2022 deduction level of $1.88 per square foot. Companies should contact their 179D advisor to evaluate the options available.
For questions, please reach out to the author: [email protected] .