With the enactment of a massive COVID relief spending package in December 2020, the §179D deduction for energy-efficient commercial buildings was finally made a permanent part of the tax code. After years of uncertainty due to the deduction’s previous status as a tax extender, this change was widely celebrated by building owners, primary designers, and tax professionals—but the new legislation also heightened the requirements with which projects must comply in order to qualify for §179D. In addition to understanding these new requirements, taxpayers should be aware of proposed legislation that could potentially expand the §179D deduction in the future.
New ASHRAE Standards for §179D Projects
Section 179D provides a tax deduction of up to $1.80 per square foot (indexed for inflation) for qualifying energy efficiency measures installed in new or existing buildings. Specifically, the deduction is worth up to $0.60 per square foot each for improvements to a building’s interior lighting systems, HVAC and hot water systems, and the building envelope. The §179D deduction is available to commercial building owners, as well as the primary designers—including architects, engineers, contractors, and green building consultants—of qualifying measures in government-owned buildings.
In order to qualify for the deduction, projects must be certified by a third party using software that has been approved by the Department of Energy. The certification must show that the measures installed in the building can reduce energy and power costs by 50% or more compared to a building that meets the minimum requirements set by the applicable ASHRAE Standard. Prior to the law that made the §179D deduction permanent, the applicable standard was ASHRAE 90.1-2007. However, the new law stipulates that projects must comply with the most recent 90.1 Standard that was in effect as of two years before construction began. For new projects beginning in 2021, this would be ASHRAE 90.1-2019—which has significantly more stringent requirements for energy efficiency than 90.1-2007.
Given the heightened energy efficiency requirements, it is particularly important for building owners and primary designers seeking to claim the §179D deduction to consult experienced tax professionals in order to ensure that their current and proposed projects will qualify. At CRG, we offer a unique combination of expertise in tax, engineering, and commercial property, and our team has helped countless taxpayers maximize their savings under the §179D deduction.
Potential Upcoming Changes to the §179D Deduction
While the §179D deduction is fortunately now a permanent part of the tax code, it may undergo future changes as lawmakers continue striving to incentivize green building. Currently, a proposed piece of legislation known as the Growing Renewable Energy and Efficiency Now (GREEN) Act would, if enacted, further expand the deduction to the benefit of taxpayers. Specifically, the GREEN Act would increase the maximum deduction amount to $3.00 per square foot for projects beginning after December 31, 2021. Additionally, it would lower the threshold needed to qualify from the current 50% reduction in energy and power costs, to a 30% reduction when compared to the ASHRAE Standard in effect two years prior to the start of construction.
While the GREEN Act’s chances of becoming law remain uncertain, commercial building owners and primary designers should stay tuned for possible future changes, as well as new opportunities to pursue §179D projects. For example, the COVID relief package that made the deduction permanent also included over $80 billion of federal funding to help K-12 schools and higher education facilities reopen safely. One of the major areas of focus is ensuring that schools’ HVAC systems are operating properly in order to improve air flow and indoor air quality, thereby reducing the chances of COVID transmission within the building. As schools across the country use this infusion of cash to update their HVAC systems, there will likely be a multitude of opportunities for primary designers to pursue projects that may qualify for the §179D deduction.
For commercial building owners and primary designers installing energy efficiency measures, it’s important to be aware of the recent and potential changes—particularly the updated ASHRAE Standards—to the §179D deduction. At CRG, our team stays current with the latest changes to this valuable incentive, and we can help you determine eligibility and maximize your tax savings. If you believe that your projects may qualify for the §179D deduction, contact CRG today to schedule a consultation!
(Sources: https://www.achrnews.com/articles/144540-hvac-upgrade-dollars-flow-to-school-districts, https://www.govtrack.us/congress/bills/117/hr848).