179D Energy-Efficient Commercial Buildings Deduction

179D Tax Deduction

Section 179D Tax Deduction (Energy-Efficient Commercial Buildings Deduction) is a tax incentive applicable to the cutting-back of energy usage in commercial property or buildings. The tax provision was implemented through the 2005 Energy Policy Act (EPACT) and was extended through December 31, 2020, by the Tax Extender and Disaster Relief Act of 2019.

  • Boost investments for sustainable and energy-saving commercial buildings or systems.
  • Promotes green technology for the design and construction of public or government-owned facilities.
Commercial Buildings

Commercial building owners with newly constructed or renovated buildings are eligible for the tax deduction. Buildings with qualifying systems installed such as interior lighting, HVAC, and building envelope systems that reduce 50% of their energy consumption compared to a minimum ASHRAE 90.1-2001 requirements can claim a tax deduction of up to $1.80 per square foot.

Who Qualifies?

  • Commercial building owner
  • Commercial tenant owning an HVAC asset
  • Government Building Designers (Architect, Engineers, Energy Consultants, ESCOs)

Qualifying Buildings

  • Office Buildings
  • Apartment Buildings (4 stories or more)
  • Retail Buildings
  • Industrial Buildings
  • Warehouses
  • Parking Garages
  • Government-owned Buildings

Qualifying Systems

  • Interior lighting systems
  • HVAC systems
  • Building envelope
Lighting and Heating System

Qualification Levels

  1. $0.30 – $0.60 Deduction
    Energy improvement in one of the three qualifying systems with energy usage reduced by 25% – 40% or more.
  2. $1.20 Deduction
    Energy improvement in two of the three qualifying systems with energy usage improved by 33 ⅓% or more.
  3. $1.80 Deduction
    Energy improvement in all three qualifying systems with energy usage improved by 50% or more.

Requirements

  • Claiming your 179D tax deduction needs an independent third-party engineer or contractor who will investigate the building to determine if the energy savings are qualified.
  • For businesses based on work performed on government-owned buildings, an allocation letter is required. The IRS has established guidance in 2008 that allows governments to transfer or allocate the deduction to the taxpayer as they are non-taxable entities and cannot benefit from the 179D tax incentive.

The property must save 50% or more energy and power costs when compared to a conceptual ASHRAE 90.1-2001 baseline building. If the 50% energy savings are met, the property is qualified for a $1.80 per square foot.

However, for properties with below 50% energy savings, you can still benefit from the tax provision with the following systems:

  • 10% Savings – $0.60 per square foot (Building Envelope Systems)
  • 15% Savings – $0.60 per square foot (HVAC Systems)
  • 25% Savings – $0.60 per square foot (Lighting Systems)

Allocation Letter

Notice 2008-40 was published by the IRS on April 7, 2008, to provide guidance on the allocation of the 179D energy tax deductions to designers. The following are some of the principal points addressed in the publication:

  • Verification of parties involved in a project
  • Cost of the installed property
  • Service year of the property
  • The allocated amount of the 179D tax deduction

Form 3115 (Application for Change in Accounting Method)

IRS published Rev Proc 2011-14 in January 2011 that allowed 179D deduction to be taken through IRS Form 3115 Change in Accounting Method. 

Applicable Tax Years
The IRS Form 3115 can be used for making adjustments for 179D deduction in previous tax years, during or after the year 2006.

Claiming Period

Commercial Building Owners: For property owners, you can claim the 179D tax deduction for the new building construction or improvements set into service around January 1, 2006, and December 31, 2020. To claim the deduction in the current tax year filings succeedingly and prevent altering of previous years’ returns, you may use Form 3115 (Change in Accounting Method).

Commercial Building Owners: For property owners, you can claim the 179D tax deduction for the new building construction or improvements set into service around January 1, 2006, and December 31, 2020. To claim the deduction in the current tax year filings succeedingly and prevent altering of previous years’ returns, you may use Form 3115 (Change in Accounting Method).

Energy Conservation Measures (ECM) Consulting

  • Evaluate the building from existing plans
  • Site visit to evaluate as-built
  • Determine building codes the as-built likely followed.
  • Create energy model of existing
  • Create energy model of proposed
  • Design and engineer proposed HVAC system
  • Manage energy efficiency aspect of construction 
  • Hold contractor meeting on energy efficiency installation procedures and expectations
  • Conduct virtual inspections of pre-insulation to certify air sealing
  • Conduct virtual inspection of post-insulation to insulation to verify proper installation of insulation
  • Conduct inspection for 45L, 179D, Cost Seg.
  • Apply for utility and state rebates
  • Certify and issue 45L certificates, and 179D and Cost Seg Report
  • ROI Analysis