The Inflation Reduction Act of 2022, introduced in August 2022, made significant headway toward energy efficiency in the United States. Since buildings are responsible for almost 40% of global carbon emissions, it’s no surprise that the IRC 179D commercial buildings energy efficiency tax deduction faced major changes. The deduction is now available to a wider range of taxpayers, and more people can claim it than ever before.
Whether you’re a first-time applicant under the expanded eligibility or you’re uncertain how the deduction has changed since the last time you claimed it, we’re here to help. Our tax consulting firm specializes in the 179D, and we have over 20 years of combined experience helping businesses save money through underutilized tax benefits. Keep reading to learn how to claim the new and improved IRC Section 179D deduction.
What is the 179D Deduction?
The 179D energy efficiency deduction was originally passed under the 2005 Energy Policy. It was designed as an incentive for commercial building owners to install energy-saving elements and lower the energy consumption of their properties. Depending on how much they reduced their energy usage, they could earn a full or partial deduction, reducing the amount of income subject to income taxes and saving them money come tax season. This original version was set to expire in 2021.
In Aug. 2022, the Inflation Reduction Act (IRA) revived the deduction and extended it for at least 10 more years. The IRC 179D extension introduced a host of other changes alongside its longer lifespan, such as adjusted qualification thresholds, expanded eligibility, increased deduction savings, and the removal of the lifetime limit. Now, the deduction is more valuable and accessible than ever.
Our national tax consultants specialize in the 179D deduction, and we’ve helped countless clients claim lucrative savings on their commercial properties during tax season. Keep reading to learn how you can claim it, too.
Qualifications to Claim the IRC Section 179D
The Inflation Reduction Act made some significant changes to the eligibility requirements of this deduction — while also increasing the reward for those who meet the highest standards. Let’s take a look at the new 179D’s essential qualifications:
Reduce Energy Consumption By At Least 25%
The foundational qualification for the 179D commercial buildings energy efficient tax deduction is, naturally, the energy efficiency of your commercial buildings. After the IRC 179D extension, the base-level amount of energy savings required to qualify for the deduction is 25%. From there, the deduction increases on a sliding scale proportional to the energy savings, with each percentage point of reduced energy consumption earning a greater tax deduction until the scale caps out at 50%.
To earn the maximum deduction, make sure your renovation or building project meets the state’s prevailing wage and apprenticeship requirements. Projects that do meet these requirements earn $5 per square foot of property when they reduce their energy usage by 50%. Projects that reduce their energy usage by 25% earn $2.50 per square foot, and every percentage in between earns an additional $0.10 per square foot to their deduction.
If your construction or renovation does not meet the state’s prevailing wage and apprenticeship requirements, you can still earn lucrative savings come tax season with this deduction. A reduction in energy consumption of 25% earns $0.50 per square foot of property, and each additional percentage increases the deduction by $0.02. The scale caps out at $2.50 for a 50% reduced energy consumption.
If you think your building may have increased its energy efficiency after an upgrade, it’s always best to discuss your options with a specialty tax consultancy firm — you may qualify for a greater deduction than you expected.
Be Mindful of the IRC 179D’s Eligibility Limitations
In the 2005 Energy Policy version of the deduction, eligibility was much stricter than it is now. Originally, once the deduction was applied to a building, it could never apply to the same building again, regardless of further renovations and energy savings.
After the IRC Section 179D extension, the lifetime limit was lifted. Now, building owners can claim the credit again as long as three years have passed since the last time it was applied, or four years in some situations. To get the most out of this opportunity, plan out your renovation projects in advance with the limitation in mind. If you know you have multiple energy-efficiency upgrades to complete and you plan to spread them out over a few years, schedule them three to four years apart to make sure you can claim your deduction efficiently for each of them.
Obtain an Allocation Letter
The 179D deduction has historically applied almost exclusively to commercial building owners. The exception to this rule was when energy-saving upgrades were installed in government buildings; since government entities don’t pay taxes, they could not benefit from the tax deduction. Instead, they could pass it along through an allocation letter to the eligible designer or architect primarily responsible for the energy savings.
The Inflation Reduction Act extended this concept beyond the original 179D. Now, any non-taxable entity can pass along their deduction to their eligible designer, not just government entities. This includes organizations such as nonprofits, religious organizations, tribal groups, and other entities categorized under IRC 501(c).
However, if you are a designer or architect hoping to claim the IRC Section 179D, take note: the IRS released a training document circulated among the staff earlier this year indicating that they will examine designer qualifications much more closely in the future. In particular, auditors will look at design contracts, technical specifications, and allocation letters — and they clarify that allocation letters alone are not enough to confirm eligibility.
The Confirmation Process
The first step to confirming your IRC 179D eligibility is the same as it was before the 179D extension: determining your building’s energy savings. Your energy consumption is compared to a reference building that meets the minimum ASHRAE standards, and the difference between the two determines your official energy savings. The comparison is performed by a software system approved by the U.S. Office of Energy Efficiency and Renewable Energy.
After the computer modeling is complete, a licensed third party must physically visit the premises and inspect your building for energy-efficient improvements. The third-party will analyze the software’s findings and compare them to their physical examination, and if they find the results satisfactory, they will sign off on the necessary documentation certifying that your building qualifies for the IRC Section 179D deduction.
Eligible designers of non-taxable buildings will also need to obtain an allocation letter from the building owner. When filing their claim, they should provide the letter, technical specifications, and all relevant design contracts.
Meet with a National Tax Consultant
The best way to maximize your tax benefits and ensure proper documentation is to consult with a tax professional. National Tax Group’s specialized tax consultants have an exceptional success rate of delivering value to our clients. If you’re interested in claiming the energy-efficient commercial building credit after the 179D extension, or if you’re curious about other benefits you may qualify for, we’re here to help. Reach out to our team today for a free assessment of benefits.