As the world grapples with the challenges of rising energy costs, energy efficiency and conservation have become critical for governments, businesses, and individuals. In the United States, the Inflation Reduction Act (IRA) was signed into law with far-reaching provisions to address energy, health, and targeted tax policies to fight inflation, increase domestic energy production, and reduce U.S. carbon emissions.
One noteworthy aspect of the IRA is the expansion of the 179D Energy Efficient Commercial Buildings incentive, which provides U.S. businesses with significant tax credits and tax deductions for new building construction or renovation of existing property. This incentive is gaining ground as a vital tool in the fight against climate change and in minimizing tax liabilities.
What Improvements are Eligible?
For businesses to maximize their saving with this deduction, it’s essential to understand the eligibility criteria for 179D. It applies to taxpayers who invest in constructing new buildings or remodeling existing structures to improve their energy efficiency within the following systems:
- Building envelope
- Interior lighting
Who is Eligible for 179D Deduction?
Before Section 179D became a permanent part of the tax code as part of the Consolidated Appropriations Bill in 2021, architects, engineers, and design-build contractors could receive allocations on projects they designed for federal, state, and local government-owned buildings. With IRA, effective from Jan. 1, 2023, the 179D deduction is now available for any qualifying commercial building, especially tax-exempt, energy-eﬃcient buildings like schools, universities, and hospitals. Buildings owned by religious, charitable and tribal organizations now qualify.
Since these buildings are owned by nontaxable entities, the deduction can then be passed on to the primary designers of the properties—engineers, architects, contractors, energy services providers, and environmental consultants—based on a first-come, first-served basis. The deduction incentivizes designers to utilize energy-efficient systems and components in construction projects.
In addition to the buildings owned by tax-exempt entities, privately-owned commercial buildings are also eligible for the 179D deduction.
Changes to the 179D Deduction
- Expansion of Eligibility Criteria
Previously, only public agencies were allowed to allocate the 179D Deduction. The IRA has expanded allocations to all tax-exempt entities, including:
- Charitable organizations
- Religious institutions
- Private schools or colleges
- Private hospitals
- Tribal governments
- Organizations falling under IRC 501(c)
Real Estate Investment Trusts (REITs), which are companies that own, operate, or finance income-producing real estate across various property sectors, are also included.
- New Deduction Amount
The deduction amount has been increased from $1.88 per square foot to $5.00 per square foot. It also allows taxpayers to claim the deduction for the same building as often as every three years (four years in some cases). Previously, the $1.88 per square foot maximum was a lifetime cap.
- ASHRAE standards update
To streamline the process of measuring the energy performance of buildings, the IRA mandates that projects must be measured against the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE) standard. It has revised this standard to evaluate energy savings from four years before the completion of construction as against the earlier two years.
Further, the deduction is no longer “one and out.” For subsequent energy-efficient improvements, businesses can claim it every three tax years and four years in case of government buildings or those owned by tax-exempt entities.
This update makes the 179D deduction more accessible and taxpayer-friendly.
Claiming 179D Deduction: The Process
To claim the 179D tax deduction, businesses need to follow due process, which broadly is divided into:
- Evaluation: Determining Eligibility for the Tax Deduction
At the center of the evaluation process is determining whether a building qualifies for the 179D tax deduction. To do this, a licensed third party evaluates the structure according to ASHRAE standards. During the physical visit, they analyze the building’s energy efficiency and compare it to a reference model for verification. This ensures the building complies with the required standards for energy efficiency.
- Documentation: Providing Proof of Eligibility
After completing the evaluation and confirming eligibility for the 179D tax deduction, the taxpayer must provide documentation to claim the tax deduction. This documentation includes allocation letters, signed by authorized personnel, confirming the building’s property ownership and energy efficiency. A report certifying the building qualifies for 179D and an energy model showing energy reduction compared to ASHRAE standards is also required.
Prioritizing Energy Efficiency Pays Off
The 179D deduction allows a large portion of energy efficiency costs to be written off in the first year, providing immediate cash flow relief. Moreover, for non-tax-paying entities, the deduction may be passed on to the architect or designer as an incentive to focus on energy efficiency and conservation in public spaces. As a result, businesses can benefit from significant tax savings while reducing their carbon footprint.
At alliantgroup, we have a team of engineers and energy modelers licensed in all 50 states, ready to assist businesses throughout the 179D tax deduction claims process. In fact, we have the unique distinction of being the only provider with all aspects of our documentation process—from obtaining allocation letters, certification of projects, and identification of designers to energy modeling—fully validated and approved by the U.S. Tax Court.
The 179D deduction, as expanded by the IRA, encourages businesses to prioritize sustainability while reaping significant financial benefits. It is an essential tool that helps overcome rising energy costs, energy efficiency and conservation while allowing businesses to double their savings. If you want to know more about how these changes may impact your business, contact alliantgroup today for expert guidance and support.
We have been working with scores of businesses and nonprofits that have taken ERC with “pop up” shop providers and now are waking up recognizing that all this may be too good to be true.
About the Author
Dean Zerbe is alliantgroup’s National Managing Director based in the firm’s Washington D.C. office. Prior to joining alliantgroup, Mr. Zerbe was Senior Counsel and Tax Counsel to the U.S. Senate Committee on Finance. He worked closely with then-Chairman and current Ranking Member of the Finance Committee, Senator Charles Grassley (R-IA), on tax legislation. During his tenure on the Finance Committee, Mr. Zerbe was intimately involved with nearly every major piece of tax legislation that was signed into law – including the 2001 and 2003 tax reconciliation bills, the JOBS bill in 2004 (corporate tax reform), and the Pension Protection Act. Mr. Zerbe is a frequent speaker and author on the outlook for short-term and long-term changes in tax policy, as well as ways accounting firms can help their clients lower their tax bill.