Signed into the tax code in the Energy Policy Act of 2005, the 179D Federal Tax Deduction is a provision to encourage new construction and building retrofit energy efficiency projects. The following is a simple guide to help professionals who are considering the 179D Federal Tax Deduction.
What is the 179D Federal Tax Deduction?
Section A of the Federal Tax Code provides a tax deduction for energy efficiency improvements to commercial buildings. Tax deductions are based on the energy efficiency of a commercial building. The building must meet energy and power cost reduction standards as outlined in ASHRAE Standard 90.1-2007. The maximum deduction is $1.80 per square foot. Lighting can partially qualify per the Interim Lighting Rule. Deductions are given on a linear scale based on how much the code is exceeded by:
- 25 percent reduction, $0.30/ft ²
- 40 percent reduction, $0.60/ft ²
It is important to note that the deduction will be capped at the cost of the qualifying property, and revenue and profit must be greater than or equal to that of the deduction amount to qualify.
Application Process
Applications must be prepared by a licensed professional engineer or licensed contractor in the jurisdiction where the building is located, as stated in IRS Notice 2006-52. Qualified energy efficient buildings must be larger than 20,000 square feet and have been put in service on or after January 1, 2006. Fully qualified energy efficient buildings must achieve a 50 percent reduction in the total annual energy and power costs and must be:
- New commercial or municipal buildings
- Retrofitted buildings
- LEED buildings
Buildings may qualify for a partial building deduction of $0.60/ft ² per category, based on the following improvements:
- Building envelope: 10%
- HVAC: 15%
- Lighting: 25%
Benefits
Commercial buildings are estimated to consume approximately 40% of total U.S. energy consumption. A reduction in energy consumption can significantly impact an organization’s triple bottom line. Additional benefits of the provision include:
- Significant reduction in taxes for retrofitted buildings with energy efficiency projects
- Improvement on the payback period of an energy efficiency project
Time Frame
The 179D Federal Tax provision will expire on December 31, 2016. The provision has been extended a number of times since 2005, and while it is likely that the provision will be extended again, the available information regarding its extension is currently unknown.
As a disclaimer, not all businesses are eligible for the 179D Federal Tax Deduction. There is a cost for a third party certification of projects to qualify them. For more information regarding the 179D Federal Tax provision and how to get in contact with a third party qualifier, talk to us. We can help you obtain a full scope of information, perform the energy efficiency audit, and perform the work eligible for the deduction.