Governments, corporations, and people must prioritize energy efficiency and conservation as the globe struggles with growing energy expenses. To combat inflation, boost domestic energy production, and lower carbon emissions in the country, the Inflation Reduction Act (IRA), which includes extensive measures addressing energy, health, and targeted tax policies, was signed into law in the United States.
The extension of the 179D Energy Efficient Commercial Buildings incentive, which offers extensive tax credits and deductions to American firms for constructing new buildings or repairing existing property, is one notable feature of the IRA. This incentive is becoming increasingly recognized as a critical asset in the battle against both climate change and reducing tax obligations.
Which Enhancements Qualify?
Businesses must know the 179D qualifying requirements to optimize their savings from this deduction. It applies to taxpayers who spend money on new construction or renovations to existing buildings to increase the energy efficiency of the following systems:
- Building envelope
- HVAC
- Interior lighting
Who Can Benefit from 179D Deduction?
Before the Consolidated Appropriations Bill of 2021, which included Section 179D as a permanent component of the tax code, architects, engineers, and design-build contractors were eligible to get allocations on projects they developed for buildings held by the federal, state, and municipal governments. Effective January 1, 2023, the IRA will allow the 179D deduction for any eligible commercial facility, including tax-exempt, energy-efficient structures like hospitals, colleges, and schools. These days, buildings held by tribes, charities, and religions are acceptable.
The critical designers of the properties—engineers, architects, constructors, energy service providers, and environmental consultants—can then get the deduction on a first-come, first-served basis since nontaxable corporations hold these structures. Designers are encouraged to use energy-efficient technologies and materials in building projects by the deduction.
Commercial buildings held by private individuals are also qualified for the 179D deduction, as those owned by tax-exempt organizations.
Modifications to the 179D Tax Credit
Expansion of the Qualification Standards
Previously, the 179D deduction could only be distributed by governmental entities. All tax-exempt organizations are now eligible for larger IRA allocations, including:
- Charitable organizations
- Religious institutions
- Private schools or colleges
- Private hospitals
- Museums
- Tribal governments
- Organizations falling under IRC 501(c)
Real Estate Investment Trusts (REITs), i.e., businesses that possess, manage, or finance income-producing real estate across various property industries, are also included.
Updated Deduction Amount
The new deduction amount has been increased from $1.88 per square foot to $5.00 per square foot. Additionally, it permits taxpayers to deduct expenses for the same building up to three times every three years (or four times in certain circumstances). The ceiling of $1.88 per square foot was formerly a lifetime cap.
Updates to ASHRAE standards
The IRA requires that projects be compared to the ASHRAE standard to simplify evaluating the energy performance of buildings. This standard has been updated to compare the energy savings from the two years before construction completion with the savings from four years ahead of schedule.
Furthermore, it is no longer a “one and out” penalty. Businesses can claim it every three tax years for future energy-efficient renovations and every four years for government buildings or buildings owned by tax-exempt institutions.
This upgrade improves taxpayer friendliness and accessibility of the 179D deduction.
Making a 179D Deduction Claim
Businesses must adhere to due procedure to claim the 179D tax deduction, which is often separated into:
Assessment: Establishing Eligibility for the Tax Credit
The main evaluating task is deciding if a building is eligible for the 179D tax deduction. A licensed third party assesses the structure following ASHRAE criteria to do this. They consider the building’s energy efficiency during the in-person visit and verify their findings by comparing them to a reference model. This guarantees that the building meets the necessary energy efficiency criteria.
Documentation: Providing Verification of Qualifications
The taxpayer has to provide supporting paperwork to claim the tax deduction after finishing the review and verifying their eligibility for the 179D tax deduction. These documents include allocation letters attesting to the building’s energy efficiency and property ownership, which have been signed by authorized staff. An energy model demonstrating the building’s energy savings compared to ASHRAE standards and a report verifying the building’s eligibility for 179D are also necessary.
Making Energy Efficiency a Priority Pays Off
Energy efficiency expenses may be written off in full within the first year thanks to the 179D deduction, which instantly improves cash flow. Additionally, non-tax-paying businesses may transfer the deduction to the architect or designer to encourage them to concentrate on energy saving and efficiency in public areas. Companies may lower their carbon impact and enjoy significant tax savings.
Let Us Help You
Businesses are encouraged to embrace sustainability while enjoying considerable financial benefits from the enhanced 179D deduction provided by the IRA. It is a crucial instrument that enables businesses to quadruple their savings while overcoming growing energy prices and promoting energy efficiency and conservation. Contact the National Tax Group for correct guidance and to understand how these changes can impact your company.