The 179D tax deduction, also known as the Energy Efficient Building Deduction, is a federal tax incentive to incorporate more sustainable practices when building and renovating commercial buildings. It allows architects, engineers, and contractors to claim a deduction of up to $5.65 per square foot for designing buildings for government and non-profits that reduce energy consumption.
The provisions of the 179D tax deduction are complex and applying requires a third-party engineer’s energy savings evaluation and report, but the benefits can be substantial. It is not too late to begin the process for the 2024 tax year.
National Tax Group can help you determine the benefit and walk you through the entire process.
How Can Architects and Engineers Claim the 179D Deduction?
For tax-exempt organizations like government and non-profit entities, tax deductions are irrelevant. Instead, they may allocate the deduction to the lead designer of their project, whether new construction or upgrades.
What Do Architects and Engineers Need for the 179D Deduction?
Energy Modeling Report – In order to claim the deduction, an energy modeling report must be conducted on the project by third party. Businesses like NTG employ engineers who specialize in the tax provisions and energy savings requirements. Their energy audits determine whether the project meets the IRS standards.
Allocation Letter – The tax-exempt organization must provide a letter allocating its deduction to the lead building designer.
What Role Does an Energy Modeling Report Play in a 179D Deduction Claim?
Energy modeling reports are comprehensive studies of the potential reduction in energy use created by the building project for which a 179D deduction claim is made.
An outside engineer determines the value of improvements to the building envelope, interior lighting systems, HVAC and hot water systems. They must employ IRS-approved software and understand the complex web of standards necessary to measure the amount of energy savings.
How Does Energy Savings Affect the Amount of the 179D Deduction?
The minimum energy savings to claim the energy-efficiency deduction is 25%, but the deduction increases in value for every percentage point of further savings up to 50%.
Here is the breakdown:
- Base deduction = $0.58 per square foot for power cost reductions of 25%.
- Additional deductions = $0.02 per square foot for each percentage point over 25%.
- Maximum deduction = $1.16 per square foot at 50%.
A prevailing wage provision adds value to deduction:
- Additional deduction for paying prevailing wage and apprenticeship requirements = $2.90 per square foot
- Additional deductions = $0.12/ square foot for every percentage point over 25%.
- Maximum deduction = $5.65/ square foot.
At full value, the average federal office building of 126,760 square feet could earn a deduction of roughly $716,000 for the engineer or architect who designed it.
What Are the Requirements for the 179D Tax Deduction?
Qualifying for the 179D tax deduction depends upon the type of building and the areas that are upgraded. The deduction applies to the following types of buildings:
- Commercial buildings (warehouses, office buildings, retail operations, factories, etc.)
- Multifamily residential buildings of four units or more
- Government or non-profit buildings.
The deduction applies to the following elements of the buildings:
- HVAC and hot water systems
- Interior lighting
- The building envelope (doors, windows, walls and insulation, roof, etc.)
The deduction applies to new builds and renovations alike, as long as they meet the energy savings requirements.
Claim Your 179D Deduction Today!
With taxes soon due, it’s a good time to begin the process of applying for the credit. Contact National Tax Group for guidance every step of the way. We can provide the energy modelling report and other expertise you will need to claim a substantial deduction.
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