§179D Energy-Efficient Building Tax Deduction

What is the §179D Tax Deduction?

The 2005 Energy Policy Act created §179D which allows property owners and designers of government buildings a significant federal tax deduction for the costs of installing energy efficient lighting, HVAC, and/or building envelope systems in commercial buildings. The §179D tax deduction offers up to $1.80 per square foot for improving the energy efficiency of existing commercial buildings or designing efficient new buildings.

Potential Benefits

Building Size
Deduction / SF
Total Potential Tax Deduction
20,000 SF
$ 1.80
$ 36,000
50,000 SF
$ 1.80
$ 90,000
100,000 SF
$ 1.80
$ 90,000
200,000 SF
$ 1.80
$ 180,000
500,000 SF
$ 1.80
$ 900,000

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What Properties Qualify?

Any commercial building constructed since 2006, and any government building constructed within the last few years that meet the efficiency threshold set forth by the IRS. Qualifying property must reduce energy use by 50% as compared to a reference building using ASHRAE 90.1, or by the specified percentage per system shown in the chart below. Additionally, the property must be placed in service between January 1st, 2006 and currently, December 31st, 2020.

Legislation
Date Placed In Service
Energy Policy Act (EPAct) of 2005
Jan. 1, 2006 – Dec. 31, 2007
The Tax Relief and Health Care Act of 2006
Extends through Dec. 31, 2008
Emergency Economic Stabilization Act of 2008
Extends through Dec. 31, 2013
H.R. 5771, the Tax Increase Prevention Act of 2014, Energy Tax Expenditures, Sec. 151
Retroactively extended through Dec. 31, 2014
Consolidated Appropriations Act of 2015
Extended from Jan. 1, 2015 – Dec. 31, 2016
The Bipartisan Budget Act of 2018
Extended for Jan. 1, 2017 – Dec. 31, 2017
H.R.1865 - Further Consolidated Appropriations Act, 2020
New installations or retrofits placed in service after Dec. 31, 2017, through Dec. 31, 2020

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What Systems Qualify?

Lighting

$0.30 - $0.60 / Square Foot

Envelope

$0.60 / Square Foot

HVAC

$0.60 / Square Foot



IRS Notice (Effective Property In-Service Dates) Fully Qualifying Property Partially Qualifying Property
Envelope HVAC Lighting (permanent rule) Interim Lighting Rule
2006-52 (1/1/06 to 12/31/08): Energy Cost Savings 50% 16-2/3% 16-2/3% 16-2/3% 25% to 40% LPD reduction (50% LPD reduction for warehouse) + other factors
2008-40 (1/1/06 to 12/31/13): Energy Cost Savings 10% 20% 20%
2012-26 (3/12/12 to 12/31/20): Energy Cost Savings 10% 15% 25%
Tax Deduction $1.80/sf $0.60/sf $0.60/sf $0.60/sf $0.30 to $0.60/sf (using applicable % from 2006-52)

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Designers of Government-Owned Buildings

Eligible designers can also qualify for §179D under a special rule for public property. In this case, designers and builders that have enhanced the energy efficiency of a new government-owned building or made energy-saving renovations and retrofits to existing government-owned buildings are able to claim the deduction. As government entities do not traditionally pay tax, the owners of these buildings can allocate the accrued tax savings to the business responsible for the energy-saving enhancements. Government-owned buildings at the federal, state or local levels can all potentially qualify for §179D, including:

• Airports
• Courthouses
• Government Offices
• Libraries
• Military Bases
• Post Offices
• Schools
• State Universities
• Town Halls
• Transportation Facilities
• And others

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Lighting-Only Study

A lighting-only study can be performed under the interim-lighting rules from IRS Notice 2008-40. The interim lighting rule applies to properties where the installed lighting power is reduced at least 25% below Standard 90.1. The tax deduction varies linearly from $0.30/ft2 at 25% savings to $0.60/ft2 at 40% savings. Warehouses are required to be 50% below Standard 90.1. Lighting controls must comply with the mandatory and prescriptive requirements of Standard 90.1 and include a provision for bilevel switching in all spaces except hotel and motel guest rooms, storerooms, restrooms, and public lobbies. Illuminance levels must meet the minimum requirements as set forth in the IESNA Lighting Handbook. Energy simulations are not required, which significantly reduces the time required to perform this type of study.

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Requirements

An energy efficient commercial building property is defined as property that meets all of the following requirements:

• Third-party certification by a licensed Professional Engineer

• Depreciation (or amortization in lieu of depreciation) is allowable on the property;

• The property is installed on or in any building located in the United States and is within the scope of ASHRAE Standard 90.1-2007 or Standard 90.1-2001 depending upon the year the property was placed in service.

• The energy reduction threshold requirements are met

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Case Studies

Case Studies Coming Soon

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Frequently Asked Questions

I am interested in pursuing the tax deduction for my building and want a more general understanding of the information involved with 179D Commercial Building Tax Deduction. Which documents would be helpful?
• IRS Notice 2006-52: http://www.irs.gov/irb/2006-26_IRB/ar11.html
• IRS Notice 2008-40: http://www.irs.gov/irb/2008-14_IRB/ar12.html
• ANSI/ASHRAE/IESNA Standard 90.1-2001
• Energy Savings Modeling and Inspection Guidelines for Commercial Building Federal Tax Deductions: http://www.nrel.gov/docs/fy07osti/40467.pdf
• U.S. Department of Energy Tax Incentives for Energy Efficiency website: http://www1.eere.energy.gov/buildings/tax_incentives.html
Which buildings do not qualify for the 179D tax deduction?
Single-family homes, multifamily buildings with three or fewer stories above grade, and manufactured houses do not qualify for the tax deduction. Buildings that do not use electricity or fossil fuel do not qualify. Religious buildings and organizations do not qualify because they are tax exempt.
What are the percent savings required for a partially qualifying property?
The IRS published a rule change in 2008 (Notice 2008-40) that changed the percentages needed for the tax deduction. The building needs to show 10% energy and power cost savings for envelope improvements, 20% for lighting improvements, and 20% for HVAC improvements. These savings are calculated from the energy used for the lighting, heating, cooling, ventilating, and hot water systems only.
Does the tax deduction apply to new construction and existing buildings?
Yes. The reference building models for determining the energy and power cost savings for new construction and retrofits of existing buildings are based on Standard 90.1. The historical performance of existing buildings is not used for the energy savings calculations for tax deduction purposes.
Does the tax deduction apply to new construction and existing buildings?
Yes. The reference building models for determining the energy and power cost savings for new construction and retrofits of existing buildings are based on Standard 90.1. The historical performance of existing buildings is not used for the energy savings calculations for tax deduction purposes.
Over what time period is the tax deduction available?
Currently, a tax deduction may be taken for a project placed in service on or before December 31, 2020.
Can I apply for the tax deduction, even if the building upgrades do not achieve the savings predicted?
Qualification for the tax deduction is based on the building’s predicted energy performance, so the predicted levels must meet the specified savings levels.
Can I apply for the tax deduction for only a part of my building?
No, the tax deduction applies to the energy performance of the whole building.
Can I apply for the tax deduction independent of how much was spent on building upgrades?
The tax deduction is the lower of (1) the value of the asset or (2) the value of the allowable tax deduction. The deduction cannot be for more than the amount that was spent on the equipment and associated installation labor.
Can multiple taxpayers participating on a project in the same building claim the tax credit?
Yes, if two or more taxpayers participate in the tax deduction activities on or in the same building and the property is subject to the permanent rule; however, the aggregate amount of the 179D deductions allowed cannot exceed the allowable amount for the specific tax deduction.
My group does not pay for the energy bill. Can I still apply for the tax deduction for my building?
The entity that is in control of the components as an asset can apply for the tax deduction.
If the building qualifies, can nonprofit organizations still qualify for the tax deduction?
No, this tax deduction is applicable only to building owners who pay taxes. The exception is for government-owned buildings where the tax deduction may be assigned to the designer.
If the building qualifies, can government organizations still qualify for the tax deduction?
The tax deduction may be assigned to the designer of government owned buildings. More information is included in IRS Notice 2008-40.
How does renewable energy fit into the tax deduction calculations and simulations?
No credit can be claimed for renewable electricity, and renewably generated electricity should not be included in calculations or simulations.
What documentation is required to show that I have met the requirements for the tax deduction?
The taxpayer claiming the tax deduction must obtain certification of the requirements from a qualified individual. The certification must contain the name, address, and phone number of the qualified individual; the address of the building; and a statement of performance matching the statements in IRS Notice 2006-52 (http://www.irs.gov/irb/2006-26_IRB/ar11.html).