The Section 179D Energy Efficient Commercial Building Deduction provides a deduction of up to $1.88 per square foot for both building owners who construct new or renovate existing energy efficient buildings as well as designers of government-owned buildings. The Inflation Reduction Act of 2022 recently signed into law significantly changes the 179D Deduction. The existing rules continue through December 31, 2022, with new rules going into effect for property placed in service January 1, 2023. Below is a summary of the major changes beginning in 2023:
- The Act lowered the minimum required savings in total annual energy and power cost from a 50% reduction to a 25% reduction. The energy and power costs are now compared to the ASHRAE Reference Standard 90.1 that was in effect for four years prior to the in-service date of the building. Observation: In the May 2022 revision of the IRS Practice Unit regarding 179D audits, Standard 90.1-2007 remains in effect until the Secretary of the Treasury has affirmed a new version of Reference Standard 90.1.
- The Act removed the existing rules for partial certifications (currently $.60 per square foot for each lighting, HVAC, and building envelope).
- The Act provides higher 179D deductions for meeting prevailing wage and apprenticeship requirements.
- If met and the building achieves a 25% reduction in energy and power costs, the deduction is $2.50 per square foot. If energy and power cost is reduced further, the deduction increases by $.10 for each additional percentage of reduction up to $5.00 per square foot. Observation: When the energy and power cost of a new or retrofitted building is reduced by 35% while meeting prevailing wage and apprenticeship requirements, the 179D Deduction would be $3.50 per square foot.
- If prevailing wage and apprenticeship requirements are not met, the 179D Deduction is $.50 per square foot for a 25% reduction. Further reductions increase the deduction by $0.02 per square foot, up to $1.00 per square foot.
- The Act removes the lifetime limit. The 179D Deduction can be taken every three tax years (four in some situations). Observation: If a taxpayer constructed a building in 2008 and took a deduction of $1.80 per square foot, prior rules prevented taking additional 179D Deductions for subsequent energy efficiency improvements. Beginning in 2023, the Act now allows for additional 179D Deductions for subsequent energy improvements.
- Previously, only public agencies were allowed to allocate the 179D Deduction. The Act expands allocations to all tax-exempt entities, including charitable organizations, religious institutions, private schools or colleges, private hospitals, museums, tribal governments, and any other organization falling under IRC 501(c). Observation: Prior to 2023, a public agency could assign the 179D Deduction to the designer of a government-owned agency. A designer is typically an architect, engineer, or a contractor that performs design-build services. Thus, a public college could assign the 179D Deduction, but a private college could not. Under the new Act, both public and tax-exempt organizations would be able to allocate the 179D Deduction to their designers.
- The Act established a new retrofit program as an election for a new alternative deduction for energy efficient building retrofit, which is taken in the qualifying final certification year. The alternative deduction requires a qualified retrofit plan and looks to reduce energy use intensity rather than total annual energy and power costs. The alternative deduction cannot exceed the aggregate adjusted basis of retrofit property placed in service pursuant to the plan.
About the Author:
Alexander Bagne, CPA, JD, MBA, CCSP is the President of ICS Tax, LLC, and an expert in tax planning strategies for real estate investors, architecture and engineering firms, and others within the construction industry. He is a strong proponent of energy efficient construction and has served as the President of the American Society of Cost Segregation Professionals (ASCSP).
This article was re-published from ICS-tax.com ‘The Inflation Reduction Act Significantly Changes the 179D Energy Efficient Commercial Building Deduction’