When the Inflation Reduction Act (IRA) was signed into law last year, it brought several welcome changes to the §179D deduction for energy-efficient commercial buildings. For example, the new law raised the maximum deduction amount from $1.88 to $5 per square foot, lowered the threshold for qualifying energy efficiency measures, and allowed new categories of building owners to allocate their deductions to primary designers. However, some uncertainty remained over which ASHRAE Standard taxpayers should refer to when determining whether their projects qualify for the §179D deduction. The IRS has provided clarification in Announcement 2023-1, which went into effect on January 1, 2023.
Qualifying for the §179D deduction
Since its creation under the Energy Policy Act (EPAct) of 2005, §179D of the federal tax code has offered a deduction based on energy efficiency measures installed in a new or existing building’s interior lighting systems, HVAC and hot water systems, and the building envelope. To qualify for the deduction, taxpayers must have their projects certified by a third party to confirm that the measures installed reduce energy and power costs by at least 25% compared to the minimum requirements of a specified standard published by the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE).
According to the Energy Efficient Commercial Building (EECB) reference standard guidelines published in the IRA, the applicable ASHRAE Standard was whichever one was in effect not later than two years from the start of construction (Standard 90.1-2019 for projects started in 2021 and 2022). IRS Announcement 2023-1, however, modified this length of time, so taxpayers may now refer to the ASHRAE Standard that was in effect not later than four years from the start of construction. This change allows the following:
- For projects that began prior to January 1, 2023, ASHRAE 90.1-2007 is the applicable Standard, regardless of when the building is placed into service.
- ASHRAE 90.1-2019 will only apply to projects placed in service after December 31, 2026.
Per the IRA, §179D deduction amounts are determined based on a sliding scale, which was not changed by Announcement 2023-1:
- Projects that achieve a minimum of 25% energy cost savings compared to the applicable ASHRAE Standard, but do NOT comply with local prevailing wage and apprenticeship requirements for workers associated with the project, will qualify for a deduction of at least $0.50 per square foot. Each 1% of additional savings above 25%, up to 50%, will yield an additional deduction of $0.02, up to $1 per square foot. However, IRS Notice 2022-61 provided one exception to this rule: projects started before January 1, 2023 may qualify for the maximum $5 per square foot deduction amount if they achieve 50% energy cost savings over ASHRAE 90.1-2007, even if they don’t meet the prevailing wage requirements.
- Projects that achieve a minimum of 25% energy cost savings and DO meet the local prevailing wage and apprenticeship requirements will be eligible for a minimum deduction of $2.50 per square foot; each 1% of additional savings will yield a $0.10 per square foot deduction, up to the maximum amount of $5.
Who can claim the §179D deduction?
The §179D deduction is typically claimed by the owners of commercial and industrial buildings who install qualifying energy efficiency measures; the IRA extended it to real estate investment trusts (REITs) as well. Additionally, the deduction may be allocated to the primary designers—such as architects, engineers, contractors, and green building consultants—of qualifying measures in buildings owned by government entities, nonprofit organizations, religious institutions, tribal entities, and not-for-profit schools and universities.
Prior to the IRA, taxpayers could only claim the §179D deduction once over the lifetime of a building. The new law changed this, however, allowing commercial buildings to be recertified for the deduction every three years, and government-owned buildings to be recertified every four years.
For building owners and primary designers seeking to improve energy efficiency, the §179D deduction offers a lucrative way to offset costs and reduce taxation—particularly in light of the recent changes under the IRA and Announcement 2023-1. The key to maximizing savings while ensuring compliance with the tax code and other IRS regulations is to work with a qualified §179D certification firm such as Capital Review Group. With a unique combination of tax and engineering expertise, our team has helped numerous clients receive five-, six- or even seven-figure tax savings through this deduction alone. Contact us today to schedule a consultation or learn more about the latest changes to the §179D deduction!