Accounting

179D Tax Deductions (2024): Guide on How To Claim

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The 179D energy tax deductions stand at the forefront of fiscal incentives for energy efficiency, illuminating the path for businesses and commercial property owners committed to sustainable development. Recognized officially as the Energy Efficient Commercial Buildings Deduction, 179D offers attractive tax benefits for the incorporation of green technologies into infrastructural projects.

As we progress into 2024, mastering the intricacies of this deduction is not merely about reducing tax obligations—it’s about contributing to a more sustainable world. This guide aims to clarify the nuances of 179D tax deductions, offering a clear roadmap for businesses eager to harness these benefits effectively.

Since the Energy Policy Act of 2005 (EPAct) was enacted, Engineered Tax Services (ETS) has led the field in energy accreditation and related tax benefits. Below, we also take a look into how ETS’s collaborative approach makes them a valuable partner for firms seeking to capitalize on energy-efficient tax incentives.

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What is the 179D Tax Deduction?

Rooted in the U.S. Internal Revenue Code, the 179D tax deduction enables owners of commercial buildings or designers of government-owned buildings to qualify for a deduction after installing energy-efficient systems. These systems span across improvements in lighting, heating, ventilation, air conditioning (HVAC), and the building envelope, which includes walls, roof, windows, doors, and floors. Initiated by the Energy Policy Act of 2005 and periodically refined, the deduction’s goal is to foster a reduction in energy and operational costs in commercial buildings through efficient design and innovative technologies.

Eligibility Criteria

For eligibility under the 179D deduction, the installed improvements must meet specific energy efficiency standards as determined by the Department of Energy. Applicable to buildings within the United States, these improvements can be part of the interior lighting, HVAC, hot water systems, or the building envelope.

The deduction is available for both new constructions and existing buildings undergoing renovations. Notably, when it comes to government-owned buildings, the deduction is accessible to the designer (be it an architect, engineer, contractor, or consultant) who played a pivotal role in the energy-efficient enhancements.

Starting January 1, 2023, eligibility for the deduction expanded to include:

  • Owners of qualified commercial properties
  • Designers of Energy Efficient Commercial Building Property (EECBP) or Energy Efficient Building Retrofit Property (EEBRP) implemented in facilities owned by designated tax-exempt organizations, such as specific government entities, Indian tribal governments, Alaska Native Corporations, and various tax-exempt groups

Prior to this change, the deduction was limited to owners of qualified commercial buildings and designers of EECBP in properties owned by certain government organizations.

What Types of Buildings Qualify?

Pre-2023

  • Commercial buildings (any size)
  • Residential buildings (4 stories or more)
  • Governmental buildings

2023 and Later

  • Commercial buildings (any size)
  • Residential buildings (4 stories or more)
  • Governmental buildings
  • Buildings owned by not-for-profit organizations
  • Houses of worship
  • Buildings owned by Tribal organizations
  • Not-for-profit schools and universities

The extension of eligibility to a broader array of buildings in 2023 and beyond marks a significant shift towards inclusivity in energy-efficient incentives, reflecting a more comprehensive approach to reducing energy consumption across various sectors.

Changes in Claiming the Deduction

Pre-2023

Claiming the 179D deduction for retrofits in tax years prior to 2023 involved options for partial systems certification along with interim rules for lighting retrofit projects. This allowed for a more segmented approach to claiming deductions based on individual system improvements.

2023 and Later

The introduction of The Inflation Reduction Act of 2022 brought about pivotal changes, notably the elimination of partial system certification and interim rules. From 2023 onwards, a whole building analysis is encouraged, or alternatively, an alternative retrofit plan can be pursued, which considers the building’s own pre-retrofit site energy use intensity (EUI). The 179D deduction can only be claimed after a building has been operational for one year, and the energy savings have been achieved and verified.

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How much is the 179 Energy Policy Act Deduction worth?

The value of the 179D deduction is intricately tied to the square footage of the commercial property. Before 2023, deductions could also be calculated based on the square footage of individual systems.

Pre-2023

The deduction value was pegged at $1.80 per square foot for the entire building, with an additional inflation adjustment. Alternatively, subsystems could qualify for $0.60 per square foot, also adjusted for inflation. Qualifying subsystems encompassed:

  • Interior lighting
  • HVAC and hot water systems
  • The building envelope

2023 and Later

The sliding-scale basis introduced in 2023 complicates the calculation but potentially increases the deduction value significantly. The deduction now depends on the percentage of energy efficiency improvement over baseline and adherence to prevailing wage and apprenticeship requirements, with a minimum savings threshold of 25% and a maximum of 50%.

REIT Update

The Inflation Reduction Act has also revised the implications for Real Estate Investment Trusts (REITs), allowing for an immediate and full financial benefit from the 179D deduction by reducing earnings and profits (E&P) in the year the energy-efficient components are installed, a change from the previous ratable five-year E&P reduction.

Steps to Claim the 179D Deduction

  1. Assess Your Project’s Eligibility: Initiate the process by determining whether your project aligns with the energy efficiency standards required. This involves scrutinizing the specific criteria for each category of improvements, such as lighting, HVAC, and the building envelope.
  2. Engage a Qualified Professional: A qualified third-party, such as a licensed engineer or contractor, must be engaged to certify that the energy savings meet or exceed the required thresholds. This professional will conduct a comprehensive energy analysis of the building.
  3. Obtain Certification: The certification entails an inspection and evaluation of the building’s energy consumption. The qualified professional must then compile a report affirming that the installed improvements adhere to the IRS’s stipulations for the deduction.
  4. Keep Detailed Records: It’s imperative to maintain meticulous documentation of all energy-efficient improvements, inclusive of costs, designs, and the certification report. Such documentation is crucial for substantiating the deduction should an IRS audit occur.
  5. Claim the Deduction: File the 179D deduction on your tax return for the year the property was placed in service. Designers working on government-owned buildings must secure an allocation letter from the respective government entity to claim the deduction

Why use Engineered Tax Services for your energy certification?

Since the introduction of the Energy Policy Act of 2005 (EPAct), Engineered Tax Services (ETS) has emerged as a leader in the domain of energy accreditation and tax advantages. By merging the skills of engineers and accountants, ETS delivers services that have supported major corporations such as Google, IKEA, and MSNBC. Their adept team offers extensive energy modeling and tax consulting, ensuring adherence to regulations while optimizing tax savings.

With a team-based strategy that includes CPAs, architects, engineers, and legal experts, ETS stands out as a top choice for energy tax consulting services. They provide a free analysis to determine qualification for 179D deductions, establishing themselves as an essential ally for companies aiming to benefit from energy efficiency-related tax breaks.

Final Thoughts

The 179D Tax Deduction, designed to incentivize commercial and public buildings towards energy efficiency, stands as a pivotal opportunity for businesses to reduce their tax liabilities while contributing to environmental sustainability. This deduction allows for significant savings for installing energy-efficient systems in lighting, HVAC, and the building envelope. Navigating the nuances of such a beneficial yet complex incentive demands the expertise of a seasoned partner.

If you’re looking for a partner for your 179D tax deductions, consider Engineered Tax Services. ETS combines engineering expertise and tax knowledge to maximize your 179D deduction benefits. Their track record with top firms also highlights their skill in turning energy efficiency into tax savings. With a complimentary analysis to assess your 179D eligibility, ETS emphasizes their dedication to empowering clients.

Recommended
Partner with Engineered Tax Services and turn complex tax challenges into winning strategies.

Drive your financial goals forward with Engineered Tax Services, where professional expertise meets personalized tax solutions.

We may earn a commission if you make a purchase, at no additional cost to you.