Law Extends and Makes Permanent Energy Efficient Building Tax Incentives

Congress passed an additional $900 billion COVID-19 stimulus relief bill in conjunction with a $1.4 trillion Omnibus spending bill, part of the Consolidated Appropriations Act, 2021 (the Act) signed into law by former President Trump on December 28, 2020. The Act addressed the so-called temporary tax extenders—many of which were set to expire at the end of 2020—by making certain provisions a permanent part of the tax code, while extending others for a period of one year or five years.

Two energy efficient building credits and incentives were included in the Omnibus spending bill, providing real estate owners the ability to plan for and generate significant tax savings from their construction projects.

Section 179D

The energy efficient commercial building deduction (Section 179D) has been made permanent and allows taxpayers to claim a deduction for as much as $1.80 per square foot for commercial building efficiency improvements above certain energy thresholds. The Act also allows for the $1.80 per square foot deduction to be increased for inflation in future years.

Newly constructed commercial buildings and improvements to existing commercial buildings are eligible for the deduction if improvements are made to three distinct categories: the lighting system, HVAC system, and building envelope.

Owners and tenants of commercial properties who have built or installed improvements after January 1, 2006, are eligible for the energy-efficient deduction. The owners of these energy efficient improvements can claim the deduction related to a prior year on a current year tax return by requesting an accounting method change on Form 3115.

Additionally, architects, engineers, or contractors who are the designers of government-owned, energy-efficient buildings can claim the deduction. On a lookback basis, designers would have to amend tax returns.

To realize the tax deductions, a contractor or professional engineer licensed in the state where the building is located must model the energy performance of the building and compare it with the standards set by the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE).

Section 45L

The energy efficient home credit (Section 45L) was extended one year to December 31, 2021. Developers can claim this credit of $2,000 per dwelling unit in newly constructed residential buildings or improvement projects, if they meet certain energy efficient standards that are certified by a qualified third-party.

Residential properties qualify if they are three stories or less, not including below-grade parking. This includes:

  • Multifamily, such as apartments, townhomes, and duplexes
  • Senior housing facilities
  • Single-family home developments
  • Student housing
  • Residential condominiums
  • Mobile home parks

The Section 45L credit can be claimed on a lookback basis by amending prior tax returns.

Learn more about the credit in our Alert.

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For more information about these credits and incentives or assistance on how to benefit from them, please contact your Moss Adams professional.

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