Section 179D Deduction: A Detailed Overview

Commercial builders and owners of commercial properties (as well as residential buildings with four stories or more) must remain informed about the most recent criteria for claiming the 179D tax deduction, a component of the savings provisions established by the Inflation Reduction Act. The implementation of this tax deduction, which is designed to promote the energy efficiency of commercial buildings, could be something you start benefiting from immediately.

 

The Inflation Reduction Act significantly broadened the scope of Section 179D; it reduced the minimum energy savings requirement to be eligible for the deduction from 50% to 25%. The maximum allowable deduction per square foot was raised from $1.80 to $5. The deduction may be claimed every three to four years throughout a building’s life cycle. 

 

This article will explain this tax deduction in detail, along with the conditions that must be satisfied in order to be eligible.

An Overview of the Deduction

An amount equivalent to the cost of energy-efficient commercial building property (EECBP) placed in operation during the taxable year shall be permitted as a deduction.

 

Maximum deduction: Product of the appropriate base rate’s cash value X by the building’s square footage

 

Initial Base Rate: $0.50 – $1.00 /square foot

  • To qualify for the deduction, energy usage must be reduced by at least 25% compared to current ASHRAE criteria.
  • The deduction rate increases by $0.02 for every 1% further decrease until the maximum 50% reduction level is achieved.

 

Base Rate if Prevailing Wage and Apprenticeship Requirements are satisfied – $2.50 – $5.00 per square foot 

  • $0.10 rise in the deduction rate for every % in additional decrease until the maximum 50% reduction is achieved.

Prevailing Wage Requirements

(According to subchapter IV of chapter 31 of title 40, United States Code) Any laborers and mechanics installing an EECBP shall be paid wages at a rate not less than the Davis-Bacon prevailing rates for construction, alteration, or repair of a similar character in the locality of such property, as most recently determined by the Secretary of Labor. Suppose a subcontractor is found to violate the prevailing wage laws. In that case, remedial measures may be implemented, including paying interest and make-up payments to the employees and a penalty to the IRS.

 

Apprenticeship Requirements

1. Labor Hours

Labor hours are defined as:

  • The total number of hours that any employee of the taxpayer, contractor, or subcontractor works on construction, alteration, or repair projects; 
  • Any hours worked by owners, superintendents, foremen, or anyone else employed in a legitimate executive, administrative, or professional capacity (as those terms are defined in part 541 of title 29, Code of Federal Regulations) are excluded from this total.

 

Qualified apprentices must perform at least the applicable percentage of the total labor hours of any construction, alteration, or repair work (including work done by contractors or subcontractors) related to such facilities.

  • 12.5%: Should building commence after December 31, 2022
  • 15%: Work starts after December 31, 2023
  • In some cases, this requirement may be waived in good faith, and remedial financial measures to meet this requirement.

 

2. Apprentice to Journeyworker Ratio

Any applicable standards for apprentice-to-journey worker ratios set out by the Department of Labor or the relevant State apprenticeship agency must apply to the percentage of total labor hours required.

 

3. Participation 

Any taxpayer, contractor, or subcontractor that hires four or more people to do construction, remodeling, or repair work must also hire one or more qualified apprentices.

 

4. Qualified Apprentice

A qualified apprentice is a person enrolled in a recognized apprenticeship program who works for the taxpayer, contractor, or subcontractor.

Property Types

An EECB property is a property concerning which depreciation (or amortization in place of depreciation) is authorized if it is:

  • Installed in a building constructed in the United States and under the purview of Standard 90.1 as it stands today.
  • Approved for installation of the following building systems on or within the structure as a component: 
    • the building envelope
    • the interior lighting systems or 
    • the HVAC (heating, ventilation, and air conditioning) systems.

 

A certification stating that the EECBP is being installed as part of a plan to cut the building’s overall annual energy and power costs by at least 25% concerning the building’s combined usage of its heating, cooling, ventilation, hot water, and interior lighting systems must be made. This should be compared to a Reference Building that satisfies the requirements of the current Reference Standard 90.1 or the minimum requirements of Standard 90.1-2007.

 

Every certification required under Section 179D must include a notice to the building owner outlining the building’s energy efficiency features and projected annual energy costs, as provided in the notice required to be provided by the Qualified Computer Software. 

 

Date of Service Commencement Relevant Reference Standard 90.1:

  • Referencing Standard 90.1-2007 after December 31, 2014, but before January 1, 2027
  • Following December 31, 2026, Reference Standard 90.1-2019

 

The reduction must be achieved solely through energy and power cost reductions for the heating, cooling, ventilation, hot water, and interior lighting systems. Cutbacks/reductions in other energy uses, such as containers, process loads, refrigeration, cooking, and elevators, should be considered in determining whether the minimum 25% reduction is achieved.

Method of Computation

The percentage decrease in the total annual energy and power expenses to the combined utilization of a building’s heating, cooling, ventilation, hot water, and interior lighting systems compared to the Reference Building must be calculated using the Performance Rating Method (PRM).

 

PRM comprises the following calculations:

  • The total energy and power costs for the following components of a Reference Building that is equivalent to the Proposed Building and is situated in the same climate zone are identical to the Reference Building Energy and Power Costs: Interior lighting, heating, cooling, ventilation, and hot water.
  • By deducting proposed building energy and power costs from reference building energy and power costs and expressing the difference as a percentage of reference building energy and power costs, one may calculate the percentage reduction in energy and power costs.
  • The procedures for baseline building performance in the PRM found in Appendix G of Standard 90.1-2004 must be followed to ascertain the Reference Building’s energy performance.
  • The Reference Building must use the following extra specifications from the 2005 California Title 24 Nonresidential Alternative Calculation Method (ACM) Approval Manual to determine baseline building performance:
    • The ACM Tables N2-2 for entire building values and Table N2-3 for building area values suited for mixed-use buildings include information on the number of inhabitants, occupant sensible and latent heat loads, receptacle loads, and hot water loads; 
    • ACM Tables N2-4 through N2-9; occupancy, HVAC, fans, infiltration, hot water, lighting, and equipment schedules;
    • Modeling infiltration per ACM Section 2.4.1.6;
    • Luminaire power for interior lighting systems derived from manufacturer data from the 2005 California Title 24 Nonresidential ACM Appendix NB.

Let Us Help You

Doubts regarding the claiming and computation process of Section 179D deduction are common. Contact the National Tax Group for correct guidance and to understand how these changes can impact your company.

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