Commercial Buildings Energy-Efficiency Tax Deduction (IRC Section 179D)

Description

The 179D Commercial Buildings Energy Efficiency tax deduction, expanded by the federal Inflation Reduction Act (IRA) of 2022, enables commercial building owners to claim a tax deduction for placing in service energy efficient commercial building property (EECBP) or energy efficient commercial building retrofit property (EEBRP).

Eligibility

Beginning January 1, 2023, the IRC § 179D deduction is available to owners of qualified commercial buildings, and designers of EECBP/EEBRP installed in buildings owned by specified tax-exempt entities, including certain government entities, Indian tribal governments, and other tax-exempt organizations. The deduction was previously available only to owners of qualified commercial buildings and designers of EECBP installed in buildings owned by certain government entities.

Buildings that qualify:

Energy Efficient Commercial Building Property (EECBP): must be installed on or in a building located in the U.S. and within the scope of a specified Reference Standard 90.1 of the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) and the Illuminating Engineering Society of North America. It must be property for which depreciation or amortization is allowable, and installed as part of the interior lighting systems, the heating, cooling, ventilation, and hot water systems, or the building envelope. It must be certified as being installed as part of a plan to reduce the total annual energy and power costs for the above systems by 25% or more in comparison to a reference building meeting the minimum requirements of Reference Standard 90.1.

Energy Efficient Commercial Building Retrofit Property (EEBRP): must be installed on or in a qualified building as part of the interior lighting systems; the heating, cooling, ventilation, and hot water systems; or the building envelope. A qualified building is a building located in the U.S. and originally placed in service not less than 5 years before the establishment of a qualified retrofit plan for the building. EEBRP must be property for which depreciation or amortization is allowable, and it must be certified as meeting certain energy saving requirements.

How the Program Works

For property placed in service in 2023 and after, the deduction equals the lesser of:

• The cost of the installed property, or
• The savings per square foot calculated as:
  • $0.50 per square foot for a building with 25% energy savings
  • Plus $0.02 per square foot for each percentage point of energy savings above 25%
  • Up to a maximum of $1.00 per square foot for a building with 50% energy savings

Expenses deducted in the prior 3 years (4 years for an allocated deduction) reduce the maximum deduction before computing the current-year deduction.

Beginning in 2023, if local prevailing wages are paid and apprenticeship requirements are met, an increased maximum deduction applies. The maximum amount increases to 5 times the savings per square foot amount. Further details can be found at Notice 2022-61.

For property placed in service before January 1, 2023, the deduction is capped at $1.80 per square foot (indexed for inflation after 2020) for buildings with 50% energy savings. A partial deduction is available on certain property. All expenses deducted in prior years are applied against the cap before computing the current-year deduction.

Additionally, under the IRA, energy savings must be measured against the latest ASHRAE standard affirmed by the Secretary of Treasury at least 4 years before the property is placed in service. For buildings that begin construction on or after January 1, 2023, and have energy efficient property placed in service on or after January 1, 2027, ASHRAE Standard 90.1-2019 applies. For buildings that begin construction before January 1, 2023, or are placed in service before January 1, 2027, ASHRAE Standard 90.1-2007 applies. Please see Announcement 2023-1 for more information.

How to Apply

The deduction is taken on the “Other Deductions” line of the taxpayer’s return. Tax returns may be amended going back three consecutive years.

Qualified business entities and individuals use Form 7205 to calculate/claim the § 179D deduction for qualifying EE commercial building property placed in service during the tax year, identify themselves as a designer or the building owner; provide information on the person performing the certification; and provide information on the person completing the allocation.

Contact Information

Internal Revenue Service (IRS),
1111 Constitution Avenue, N.W.,
Washington, D.C. 20224
1 (800) 829-1040