Taking Advantage of the 179D Deduction for Energy Efficient Commercial Building Properties

Additional Marcum Resources

Building Energy Tax Incentives Made Permanent

The Consolidated Appropriations Act, 2021 (the Act), enacted on December 27 as 2020 came to a close, extended a number of tax provisions. One of these is the Commercial Buildings Energy Efficiency Tax Deduction, or the Energy Policy Act (IRS Code Section179D), an energy efficiency tax incentive available for both commercial and government buildings.

Section 179D, which has been in effect since 2006, was originally enacted by the Energy Policy Act of 2005 (EPAct 2005). This Code Section primarily enables building owners to claim a tax deduction for installing qualifying energy efficient commercial building property systems. Depending on the lease, tenants may also be eligible for this tax deduction benefit. Benefits may additionally extend to architects and designers of certain government buildings.

Section 179D was originally set to expire at the end of 2020. The Act makes this important provision permanent. Additionally, the amount of the tax deduction (currently maximized at $1.80 per square foot) will be subject to annual increases based on inflation.

As noted, the tax incentives provide for a deduction of up to $1.80 per square foot for qualified improvements that make an entire building substantially more energy efficient. The areas that qualify for improvements might include interior lighting, heating, ventilation and air-conditioning systems (HVAC), and the building envelope, which includes the exterior part of a building such as the roof, walls, insulation, doors, windows and foundation. To qualify, the building’s lighting, HVAC and building envelope systems must be more efficient than standards set by the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE), by specified levels.

A deduction of up to 60 cents per square foot is also available for making either lighting, HVAC or the building envelope more energy efficient. Lighting renovations are the easiest and most common way to qualify for a 179D deduction.

Commercial or government facilities that have not implemented renovations in recent years should consider the advantages of this deduction, especially lighting changes. Besides the immediate upfront deduction, this tax incentive is an impetus for building owners to consider more efficient products now available, not only for 179D purposes, but for energy and utility bill savings.

Due to the fact that government organizations, such as schools or government buildings, do not pay taxes, they are unable to take advantage of this deduction. Therefore, the 179D deduction provides that the designers of such government buildings (including architects, engineers, energy consultants and retrofitters) are eligible to receive the tax benefit for building energy projects completed beyond 2020. Eligible government buildings include federal, state and local building categories. The largest government building categories include K-12 public schools, state universities and community colleges.

The Section 179D deduction can only be claimed after obtaining certification from an engineer or contractor that is properly licensed in the jurisdiction in which the building is located.

Overall, the 179D deduction provides an opportunity for an advanced deduction for those businesses intent on future renovations utilizing energy efficient products, in addition to the opportunity to reduce waste and save on energy costs.

All commercial buildings are eligible for this incentive. The benefits are particularly advantageous for large distribution centers/warehouses and industrial buildings. Companies that have had renovations, or are planning changes, should consider this benefit.

Consult your Marcum tax advisor with any questions or for more information.