The IRS has announced important updates to the Energy-Efficient Commercial Buildings Deduction under Section 179D for the 2025 tax year, as detailed in Revenue Procedure 2024-40. These adjustments are set to significantly benefit building owners, architects, and designers who invest in energy-efficient technologies and sustainable building practices.
Understanding the §179D Deduction
The §179D deduction provides a substantial tax incentive for those who incorporate energy-saving features into commercial buildings. The deduction is calculated based on the square footage of the building and the energy efficiency improvements made in systems such as lighting, HVAC, and building envelopes. To qualify, taxpayers must demonstrate reduced energy usage compared to a baseline that aligns with ASHRAE standards.
Key Adjustments for 2025
For taxable years beginning in 2025, the IRS has made significant inflation-based adjustments to the §179D deduction:
Base Deduction Increase:
The base deduction under §179D(b)(2) has been raised to $0.58 per square foot, with a maximum potential deduction of $1.16 per square foot. For every percentage point that energy savings exceed 25%, an additional $0.02 per square foot is added to the deduction.
Enhanced Deduction for Labor-Qualified Projects:
For projects meeting prevailing wage and apprenticeship requirements under §179D(b)(3), the deduction starts at $2.90 per square foot, potentially reaching up to $5.81 per square foot. Each percentage point above the 25% energy savings threshold increases the deduction by $0.12 per square foot.
These changes ensure that the §179D incentives remain competitive and encourage further investment in energy efficiency.
Benefits of the Updated Deduction
The increased deduction limits present several advantages for businesses:
- Maximized Tax Savings: Depending on your project’s energy savings, deductions can now reach up to $1.16 or $5.81 per square foot, providing substantial tax benefits.
- Competitive Advantage: Energy-efficient buildings not only reduce operating costs but also attract tenants and investors who prioritize sustainability.
- Support for Sustainable Practices: These incentives align financial benefits with environmental responsibility, promoting a greener built environment.
Steps to Optimize Your §179D Deduction
To maximize these new deductions, consider the following steps:
- Evaluate Energy Savings: Assess how your project reduces energy usage compared to ASHRAE standards.
- Apply Incremental Deductions: For each percentage point above 25% energy savings, adjust your deductions accordingly ($0.02 or $0.12).
- Verify Compliance: Ensure your project meets all necessary standards and is certified by a qualified professional.
Conclusion
With these updates to the §179D deduction for 2025, now is an ideal time for building owners and designers to invest in energy-efficient systems. By taking advantage of these enhanced deductions, you can significantly reduce tax liabilities while contributing to a sustainable future.
For expert guidance on navigating these changes and maximizing your §179D deductions, contact National Tax Group today! Our team is ready to help you unlock maximum tax savings while enhancing your project’s sustainability.
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