A prominent federal tax benefit, the §179D Energy Efficient Commercial Building Tax Deduction, was modified by the Inflation Reduction Act of 2022. It began as the “Build Back Better,” upgrading in the middle of 2022 to become the Inflation Reduction Act of 2022, also known as the IRA.
The act significantly impacted several businesses and was centered on important issues, including environmental justice, decarbonization, and inexpensive and accessible energy. It also included several real estate-related measures directly affecting commercial building owners and developers.
Now that most of the incentives are taking effect for 2023 tax returns, it’s necessary to review the legislation and determine how the real estate industry may take advantage of the IRA and available tax benefits.
Tax Deduction for Energy-Efficient Commercial Buildings
The 179D Tax Deduction may not be brand-new, having been enacted in 2005, but it did get significant revisions as part of the IRA in 2022. Several procedures need to be approved to incentivize the developers and owners of modern, energy-efficient commercial or high-rise residential structures and claim the deduction, such as creating an energy model with certified software and having a licensed third-party professional engineer inspect the site.
Pre-IRA:
- 179D is a deduction, not a credit.
- The deduction must be multiplied by the company's tax rate to determine the true tax benefit.
- If the business is required to pay taxes, it may utilize these deductions to lower its assessable revenue and, thus, its tax liability. The deduction can be carried forward indefinitely if there is no tax liability.
- Before the new legislation, three categories of energy efficiency were measured: lighting, envelope, and HVAC systems. Eligible buildings could claim a tax deduction of up to $1.80, adjusted for inflation (for projects placed in service before 1 January 2023).
- A deduction of $0.60 (again, adjusted for inflation) was provided per system for advances that only showed efficiency across one or two of the systems.
Post IRA Update:
- All tax-exempt organizations are now eligible to claim the IRA-updated 179D deduction. Real Estate Investment Trusts (REITs), businesses that own, manage, or finance income-producing real estate across a range of properties, are also included.
- The deduction amount has been raised up to $5.36 per square foot for buildings placed in service after 1 January 2023.
- Additionally, taxpayers can deduct expenses for the same building up to three times per three years (or four times in certain circumstances).
- ASHRAE standard updated to compare the energy savings from two years before construction completion with the savings from four years ahead of schedule.
- Buildings whose construction started before January 29, 2023, and were put into service after that date won’t have to adhere to prevailing wage and apprenticeship requirements. According to these guidelines, many developers who put their projects into service in 2023 or still intend to do so in 2024 can take advantage of the higher deduction range.
Making Energy Efficiency a Priority Pays
Thanks to the 179D deduction, energy efficiency expenses can be written off in full within the first year, instantly improving cash flow for real estate owners and developers. Additionally, non-taxpaying businesses may transfer the deduction to the architect or designer to encourage them to concentrate on energy saving and efficiency in public areas. Consequently, companies can lower their carbon impact and enjoy large tax savings.
At National Tax Group, our team of tax specialists, engineers, and energy modelers is prepared to support you for your 179D deduction claim. Reach out to us today for expert advice and assistance if you want more information about how these changes might affect your deduction amount.