179D Energy Efficient Commercial Building Deduction Made Permanent

On December 27, President Trump signed into law the Consolidated Appropriations Act, 2021 (the Act), a provision of which makes the Energy Efficient Commercial Building Deduction (179D) permanent. Originally passed as part of the Energy Policy Act of 2005 and expiring in one to two-year increments since, the 179D deduction was set to elapse again on December 31.

Prior to the Act, 179D provided a maximum deduction of $1.80 per square foot of the building and measured energy efficient improvements to commercial property by referencing the 2007 ASHRAE standard. The Act makes two significant changes; first, the deduction of $1.80 per square foot (which had not changed since 2005) will increase annually starting in 2021 to account for inflation and, second, taxpayers will utilize the ASHRAE standard in effect two years prior to the start of construction.

What are the tax benefits and who qualifies?

The 179D deduction allows taxpayers to take a federal deduction for the installation of energy-efficient interior lighting, HVAC and building envelope systems. It’s available to building owners and lessees that make energy-efficient improvements to their commercial buildings located in the United States.

Designers (architects, engineers, contractors or energy service companies) of government-owned buildings may also be assigned the 179D deduction from a government agency if they’re the primary designer of the applicable system and the agency allocates the deduction to them by signing a municipal allocation letter. Examples of the type of public projects that may qualify for the assignment of the 179D deduction include:

• Schools, including state universities
• Libraries
• Airports
• Government offices
• Post offices
• Courthouses

How the 179D Deduction Works

A building completed in 2020 is eligible for the entire $1.80 per square foot federal tax deduction if it saves at least 50% in energy and power costs for improvements in lighting, HVAC and building envelope, as compared to a building that meets 2007 ASHRAE standards, based on the date the building is placed in service. If the building fails to meet the full 50% energy savings standard, a partial deduction of $0.60 per square foot is available for each subsystem that meets certain energy-saving requirements. To claim the 179D deduction, the property must be certified by a qualified independent third party.

The deduction is generally available in the year the property is placed in service. If a property is certified in a year after that, the taxpayer may be required to amend prior returns to claim the deduction. But if the taxpayer owns or leases the commercial building (as opposed to being allocated the deduction from a government agency), the IRS allows them to file for a change in accounting method to claim the deduction in the year the accounting method is changed, the advantage of which allows them to avoid costs and other issues associated with amending tax returns.

It’s important to note that taxpayers that own or lease the commercial building must reduce their tax basis of the building by the amount of the 179D deduction. Also, a taxpayer that’s allocated 179D deductions from a government agency must reduce his or her stock basis for the 179D deductions.

If you have any questions about the potential benefits of 179D, don’t hesitate to contact Mark A. Di Pietrantonio or another member of the Schneider Downs Construction Industry Group.