179D Tax Deduction
Energy Efficient Commercial Building Deduction
What is 179d (EPAct)?
The Energy Policy Act of 2005 (EPAct) created IRC 179D – Energy Efficient Commercial Buildings (not to be confused with Section 179 – Expensing for Small Businesses). The Congress wanted to incentivize the private and public sectors to build energy-efficient buildings. Commercial buildings consume 36% of US electricity that improving their energy efficiency would be a big step toward energy independence.
The incentive was to provide an immediate tax deduction for costs incurred to increase the energy efficiency of newly constructed or existing buildings. These tax benefit works as accelerated depreciation in that the amount expended is depreciated in the 1st year instead of 27.5 or 39 years. The deduction is for renovations or newly constructed buildings placed in service after 1/1/2006.
How much is the 179d tax deduction?
The maximum deduction is $1.80/ft2 of building space. The maximum deduction can be achieved by reducing energy costs by 40-60%, depending upon the type of building, as compared to a
reference building that meets the minimum standards of ASHRAE 90.1-2001.
The total deduction may not exceed the amount expended on the energy-efficient property placed in service during the taxable year. The Tax Benefit works as accelerated depreciation in that the amount expended is depreciated in the 1st year instead of 27.5 or 39yrs.
How does 179d tax deduction work?
The statue and regulations measure energy efficiency in 3 areas: Lighting, HVAC, Building Envelope. The key provision in 179d is technology neutral. Congress didn’t direct how energy efficiency should be achieve; 179d just rewards success. With how some technology has improved since EPAct was enacted, a building owner may achieve the maximum deduction just from a lighting upgrade to LED alone!
179d requires the taxpayer to obtain an independent certification by a licensed engineer using IRS approved software to verify and calculate the energy savings after the building has been placed in service.
What Type of Buildings Qualify for 179d?
Any commercial property owner is eligible that was built or renovated after 1/1/2006.
Office, Retail Strip Center, Warehouse, Parking Garage, Hotel/Motel, Manufacturing Facility,
Auto Dealership, Hospital, Private Schools.
Any leasehold improvements or renovation costs can qualify also.
Eligible Improvements for 179d
Eligible improvements must reduce energy use for any of the following categories:
Lighting, HVAC, and/or Building Envelope.
There are different ways to pursue a deduction and all require comparison to ASHRAE 90.1-2001 and certification by a qualified engineer using IRS approved software in determining the deduction.
Architects/Engineers/Designers for Governmental Buildings
The Architect or Engineer or Designer who implement energy efficient designs on government buildings are eligible for the Tax Deduction even though they didn’t pay for the project. EPAct desired to create an incentive to incorporate today’s energy efficient products into government buildings to help the government sector save energy costs.
Government buildings include but not limited to: federal buildings, state buildings, municipal buildings, county buildings, state universities, public schools, libraries, police and fire stations, etc.
Other Incentives to promote Energy Efficiency
Many states offer incentives for investments into energy efficiency. These programs often take the form of grants, loans or state tax credits related to the cost of energy efficient project. For instance, New Jersey Clean Energy Program offers grants
free money. Additionally, utility companies incentivize customers to reduce energy consumption for improving energy efficiency.
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