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Energy Policy Act 179D Tax Deduction
The 179D Energy-Efficient Commercial Buildings Tax Deduction provides incentives to building owners, designers, architects, and engineers when making energy-efficient improvements to commercial buildings. To qualify, newly constructed or renovated buildings must meet or exceed some key energy reduction requirements and ASHRAE standards.
179D – A Brief History
In 2005, the introduction of 179D marked the beginning of a temporary tax incentive aimed at promoting energy-efficient design in commercial buildings. Over the years, Congress extended this deduction multiple times until it expired in 2016. However, the Consolidated Appropriations Act rectified this by making 179D a permanent incentive, retroactively reinstating it for the 2018 and 2019 tax years.
Eligible building systems covered by this incentive include the building envelope (roof, walls, windows, and doors), as well as interior lighting and HVAC systems. Examples of energy-efficient improvements that qualify for the deduction encompass high R-value insulation, specific roofing systems, solar integration, daylighting, and more.
Before the enactment of the Inflation Reduction Act (IRA), buildings were required to achieve a 50 percent reduction in overall energy use to receive the full tax benefit. However, the deduction amounts have undergone changes over time.
For instance, the full 179D deduction per square foot was:
- $1.80 for buildings placed in service before 2021
- $1.82 in 2021
- $1.88 in 2022
179D Under the Inflation Reduction Act
The Inflation Reduction Act introduced modifications to the 179D deduction. Now, the base deduction amount stands at $0.50 per square foot, but it can reach up to $5.00 per square foot for achieving full energy reduction alongside complying with new labor rules.
The updated deduction amounts are as follows:
- $0.50 per square foot: 25 percent energy reduction in the overall building
- An additional $0.02 per square foot for every percentage point above 25 percent energy reduction, up to $1.00
- $1.00 per square foot: 50 percent energy reduction in the overall building
- $2.50 per square foot: 25 percent energy reduction in the overall building plus prevailing wage and apprenticeship hours
- An extra $0.10 per square foot for each percentage point above 25 percent energy reduction, up to $5.00
- $5.00 per square foot: 50 percent energy reduction in the overall building plus prevailing wage and apprenticeship hours
Architects, engineers and building owners can claim the 179D deduction every three years, provided they make qualifying upgrades. Furthermore, starting from 2023, real estate investment trusts (REITs) and tax-exempt buildings are also eligible to take advantage of this deduction, expanding its utilization and value.
For the most current information about 179D under the Inflation Reduction Act, go to https://www.irs.gov/credits-deductions/energy-efficient-commercial-building-deduction or click the button below.
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- Add LEED points to your project with energy efficient spray foam, and ours is made from 25% recycled and renewable materials. Our product also has its own EDP (Environmental Product Declaration).
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- The architectural support team at HBS is available to provide expert advice on a wide variety of applications.
- We make sure everything is as it should be, from thermal insulating values (R-values) to building code compliance.
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