179D Energy Efficient Commercial Buildings Deduction

Eligibility Criteria

• Building Types: Commercial buildings, including offices, retail spaces, warehouses, and multifamily properties of four stories or more.

• Eligible Parties:
  • Building Owners: Owners who invest in energy-efficient property.
  • Designers: Designers (architects, engineers, contractors) of government-owned buildings can receive allocated deductions.

Qualifying Improvements

To qualify, improvements must reduce energy and power costs by a specified percentage compared to a reference building meeting the minimum requirements of ASHRAE Standard 90.1. Qualifying systems include:

• Interior Lighting Systems
• Heating, Ventilation, and Air Conditioning (HVAC) Systems
• Building Envelope (e.g., insulation, windows)

Deduction Amounts

• Full Deduction: Up to $5.00 per square foot for buildings achieving a 50% reduction in energy and power costs.

• Partial Deduction: Available for individual systems (lighting, HVAC, building envelope) that meet specific energy reduction targets.

Recent Updates

The Inflation Reduction Act of 2022 introduced significant changes:

• Increased Deduction Limits: Enhanced deduction amounts, with a base deduction and a bonus deduction for projects meeting prevailing wage and apprenticeship requirements.

• Updated Energy Standards: Energy savings must be measured against the latest ASHRAE standard affirmed by the Secretary of Treasury at least four years before the property is placed in service.

Application Process

• Energy Modeling: Conduct a detailed energy analysis using qualified computer software to demonstrate the required energy savings.

• Certification: Obtain certification from a qualified individual or firm confirming that the building meets the energy efficiency requirements.

• Documentation: Maintain thorough records, including the energy model, certification, and details of the installed systems.

• Tax Filing: Claim the deduction using IRS Form 7205, “Energy Efficient Commercial Buildings Deduction.”

Additional Considerations

• Basis Reduction: The building’s basis must be reduced by the amount of the 179D deduction claimed.
• Allocation for Tax-Exempt Entities: Designers of energy-efficient systems in buildings owned by tax-exempt entities (e.g., government buildings) can be allocated the deduction.
• Compliance: Ensure all installations and certifications comply with the latest IRS guidelines and ASHRAE standards.