On December 20, 2019, President Trump signed a $1.4 trillion spending bill that funds the government through fiscal year 2020. The bill also extends the Energy Efficient Commercial Building Deduction (179D) through December 31, 2020. Prior to the extension, 179D had expired on December 31, 2017. As a result, taxpayers claiming 179D deductions for 2018 may be required to file amended returns.
The spending bill retains the majority of the prior law, including the maximum deduction of $1.80 per square footage of the building, as well as the definition of an “energy-efficient commercial building property,” which retains the 2007 ASHRAE standard.
What are the Tax Benefits of 179D?
179D allows taxpayers to take a federal tax deduction (up to $1.80 per square foot) for the installation of energy-efficient interior lighting, HVAC and building envelope systems.
Who Qualifies for the Deduction?
The deduction is available to building owners and lessees who make energy-efficient improvements to their commercial buildings located in the United States before December 31, 2020.
Designers of government-owned buildings may also be assigned a 179D deduction if they’re the “primary designer” of the applicable system and the government agency in question allocates the deduction to them by signing a “municipal allocation letter.” Examples of the type of public projects that may qualify for the assignment include:
Schools, including state universities
How the 179D Deduction Works
A building 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 the 2007 ASHRAE standards), based on the date the building is placed in service. If a building doesn’t 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, and is generally available in the year the property is “placed in service.” If the property is certified in a year after the building is placed in service, the taxpayer may be required to amend prior returns to claim the deduction. However, if the taxpayer owns or leases the commercial building (as opposed to being allocated the deduction from a government agency), the IRS will allow the filer a “change in accounting method” to claim the deduction in the year the accounting method is changed, which then allows them to avoid costs and other issues associated with amending tax returns.
It’s important to note that taxpayers who own or lease a commercial building must reduce their tax basis of the building by the amount of the 179D deduction. In addition, a taxpayer allocated 179D deductions from a government agency must reduce his or her stock basis for the 179D deductions.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.