Maximize Your Savings: How Recent 179D Deduction Changes Increase the Value of Energy Efficient Improvements
Since its inception on January 1, 2006, the 179D deduction has provided taxpayers with a significant tax incentive for making energy efficient improvements to commercial buildings. Up until now, the primary types of buildings eligible for the tax deduction are newly constructed commercial buildings, or government owned buildings. Recent revisions to the tax law allow for expanded eligibility of the 179D deductions related to energy efficient enhancements to also include older buildings. These revisions also allow for buildings owned by tax exempt entities, Indian tribal government entities, and certain Real Estate Investment Trusts (REITs) to qualify for the 179D deduction.
Prior to tax years ending on December 31, 2022, to qualify for the 179D deduction, the energy-efficient improvements must have reduced the overall annual energy and power costs of the building by 50%. The three eligible categories of energy building systems improvement costs were interior lighting, HVAC/hot water systems, and building envelope systems. If 50% energy savings were achieved for a given system, a total deduction equal to $0.63 per square feet of qualified building property installed could be realized. Any given building could achieve a maximum of $1.88 per square foot of qualified 179D deductions if all three of the described systems were installed and met the energy savings thresholds.
Section 179D Changes
Under changes recently passed in the Inflation Reduction Act of 2022, the energy savings threshold was reduced to 25% overall energy cost savings. The lower limit of energy savings now allows for improvements to older buildings, which may not have been able to reach the previous 50% threshold, to now potentially qualify for the 179D deductions. If energy savings of at least the 25% threshold are met, the deduction will be $0.54 per square foot. For every 1 percentage point above 25% of energy savings, an additional $0.02 per square foot of deduction is available, up to a maximum of $1.07 per square foot. In addition, an enhanced deduction is available for taxpayers who employ labor at the prevailing wage rate and apprentice skilled labor for the location of the building project. The deduction threshold begins at $2.68 per square foot if the prevailing wage and apprenticeship qualifications are met in the construction contracts. A maximum deduction of $5.36 per square foot is possible if the contract’s prevailing wage and apprenticeship qualifications are met.
The taxpayers who have the greatest potential to benefit from the expanded 179D deductions are those in the construction industry, most notably architectural firms, design-build contractors, and various engineering disciplines such as mechanical, electrical, and civil engineering. Taxpayers working with building owners in the tax-exempt space will need to act quickly in order to secure the applicable 179D deductions available. The available deductions are on a first-come, first served basis, so careful planning, and scheduling will be necessary during the project bidding process to apply for and secure the qualifying 179D deductions.
For more information about McKonly & Asbury’s Architecture, Engineering, and Construction (AEC) experience, visit the AEC Industry Page and don’t hesitate to contact a member of the AEC team.
About the Author
Jeremy joined McKonly & Asbury in 2022 and is currently a Partner with the firm. He is a key member of our firm’s Tax Segment working with business owners and their outside professional advisors in developing comprehensive strategies… Read more
