Constructing, improving, or designing buildings to be energy efficient may help you meet sustainability goals and could also increase your cash flow and reduce federal income tax liability.
Claiming the Internal Revenue Code (IRC) Section 179D tax deduction requires compliance with various tax code and industry standards, rigorous energy modeling, and third-party certification by a qualified individual.
Confidently pursue this energy incentive and put money back into your business with guidance and certification from our professionals.
Deduction Overview
For tax years 2022 and prior, the Section 179D deduction allows a deduction of up to $1.88 per square foot for taxpayers—or the designer if the building is government-owned—that improve the efficiency, above certain thresholds, of their commercial buildings and residential rental buildings that are four stories high or more.
Beginning in tax year 2023, the Section 179D deduction increased to up to $5.00 per square foot. Additionally, the deduction expanded and allows for tax-exempt entities including government-owned, not-for-profit organizations, churches and other religious organizations, Tribal organizations, and not-for-profit schools and universities to allocate deductions to eligible designers.
The Section 179D tax deduction is a permanent part of the tax code and doesn’t expire.
To What Type of Buildings Does the Section 179D Tax Deduction Apply?
The deduction applies to newly constructed or improved buildings that exceed Standard 90.1 requirements published by the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) and the Illuminating Engineering Society of North America.
The proper standard used to evaluate building performance differs based upon when the building was placed in service.
The provision applies to reduced energy costs in three areas:
- Building envelope
- Heating, cooling, ventilation, and hot water systems (HVAC)
- Interior lighting systems
Who Can Claim the Section 179D Tax Deduction?
The following taxpayers are eligible to claim the energy efficient building deduction:
- Owners and tenants of commercial buildings who built or installed improvements
- Owners of four-story or greater residential buildings who built or installed improvements
- Designers of government-owned buildings, such as architects, engineers, contractors, or energy service providers
- Designers of buildings owned by not-for-profit organizations, churches or other religious organizations, Tribal organizations, and not-for-profit schools and universities beginning with tax year 2023
- Real estate investment trusts (REITs) constructing eligible buildings beginning with tax year 2023
Businesses in many industries can benefit from the deduction, but it can prove especially valuable for the following industries:
- Professional services
- Health care
- Hospitality
- Manufacturing
- Real estate
- Retail
How Is the Section 179D Tax Deduction Calculated?
The deduction is calculated based on the square footage of these improvements. The larger the building, the greater the potential for significant tax deductions.
Depending on the level of energy efficiency achieved, potential deductions can include the following based upon when the building was placed in service:
During tax year 2022 and prior:
- Maximum deduction is $1.80—inflation adjusted up to $1.82 and $1.88 for tax years 2021 and 2022, respectively—per square foot for a 50% reduction in total annual energy and power costs with respect to the combined usage of all three systems
- Partial deduction is $0.60—inflation adjusted up to $0.61 and $0.63 for tax years 2021 and 2022, respectively—per square foot, per system, for reductions of energy consumption related to the interior lighting, HVAC, or building envelope
During tax year 2023 and beyond:
- Maximum deduction is $5.00—inflation adjusted yearly starting in tax year 2023—per square foot for a 50% reduction in total annual energy and power costs with respect to the combined usage of all three systems if prevailing wage and apprenticeship requirements are met or construction started prior to January 29, 2023.
- A sliding scale from $2.50 per square foot for energy savings of 25% up to $5.00 per square foot for energy savings of 50% or greater if prevailing wage and apprenticeship requirements are met or construction started prior to January 29, 2023. These deduction rates are adjusted for inflation beginning in tax year 2023.
- A sliding scale from $0.50 per square foot for energy savings of 25% up to $1.00 per square foot for energy savings of 50% or greater if prevailing wage and apprenticeship requirements aren’t met. These deduction rates are adjusted for inflation beginning in tax year 2023.
Maximum Deductions Based on Building Size