IRC Section 179D Tax Deductions
§179D Energy Efficient Commercial Building Deduction
Only 10 percent of qualifying projects utilize the Section 19D Deduction. Don't miss out. As part of the Energy Policy Act of 2005, the Commercial Building Deduction encourages companies to “Go Green” to not only save money on their utility bills, but on their tax returns as well. This tax incentive is often referred to as EPAct and is codified in Section 179D of the IRS tax code.
How it Works
Commercial building owners can take a Federal tax deduction of up to $1.80 per square foot of the building’s floor area if they install property that reduces energy and power costs. These installations need to be a part of the building’s interior lighting systems, heating, cooling, ventilation, hot water systems or building envelope. The deduction is allowed for both new construction and remodeling and the building must be placed in service between 2006 through 2016.
To achieve the maximum $1.80 deduction, energy and power costs must be reduced by at least 50 percent when compared to a reference building. If a building comes in under 50 percent, it may still qualify for a deduction of $.60 or $1.20 per square foot by looking at individual systems. For partial deductions, the requirement for the building envelope is a 10 percent improvement. For lighting and HVAC/hot water systems, the improvement must reach a 20 percent threshold (see process map). Additionally, there are special rules for lighting-only projects applicable to both new construction and retrofits, which use a graduated scale. The standards for the reference building are somewhat dated and the thresholds can often be met through current design techniques.
Note that this Federal tax incentive is a deduction rather than a tax credit, meaning that the cash benefit is calculated by multiplying the deduction times the tax rate, which is usually 40%.
Examples of Energy-Efficient Building Materials and Systems
- High-efficiency insulation in walls, ceilings, roofs and floor
- Automatic thermostats, lighting controls and other monitoring equipment
- Energy-efficient fixtures
- Ultra-efficient air conditioners and furnaces
- High-performance glazing and other energy-efficient materials on the building envelope
- Natural ventilation
- Improved fan efficiency
Special Rule for “Designers” of Government Buildings
A special rule allows a governmental entity to assign the deduction to the person primarily responsible for designing the building, such as architects or engineers. Similarly, the deduction may be assigned to contractors for designing and choosing efficiency upgrades, such as lighting and HVAC systems. Thus, if you are involved in the design of a community center, public educational facility, municipal parking garage, or other government building, you may qualify for the deduction.
Claiming the Deduction
- The deduction is available to both new construction and remodeling of commercial buildings performed between 2006 through 2016.
- The building must meet energy and power costs reduction standards as detailed in ASHRAE Standard 90.1-2001, Energy Standard for Buildings Except Low-Rise Residential Buildings (effective April 2, 2003).
- An independent, qualified individual must verify and certify that the property installed satisfies specific energy efficiency requirements using IRS-approved software.
- If the tex deductuin expires, Congress has indicated it's commitment to renewing this tax deduction. It has expired 4 or 5 times since 2005 and both parties have major constituents who want these deductions.
How We Can Help
- Calculate the amount of the additional deduction.
- Coordinate with your tax preparer to claim the deduction.
- Certify the energy efficiencies, which may require:
- Review of construction documents;
- Discussions with building designers, project managers, and related personnel.
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