179D Tax Credit
What is 179D Tax Credit ?
Section 179D allows a taxpayer that owns or leases a commercial building to deduct a portion of the cost of energy efficient commercial building property. The property must be installed on or in a building as part of the (1) interior lighting system, (2) heating, cooling, ventilation, and hot water system, or (3) building envelope, and must be certified to be part of a plan to reduce the total annual energy and power costs of these systems by at least 25% (50% for tax years beginning before 2023).
179D’s goal is to provide a tax incentive for energy-efficient systems placed undergoing new construction and renovations of facilities.
Properties Placed-In-Service in Tax Year 2022 and Prior:
The tax incentive is based on the total square footage and specifically focuses on these three
elements of the building Mechanical (HVAC), Lighting Systems and Building Envelope. The
building design must exceed ASHRAE 90.1 2007 by the following percentage:
|
Energy Efficient System |
Energy Cost Savings % |
Deduction Rate |
|
HVAC and Hot Water |
15% |
$0.60/SF |
|
Interior Lighting |
25% |
$0.60/SF |
|
Building Envelope |
10% |
$0.60/SF |
|
Combination of HVAC/IL/BE |
50% |
$1.80/SF |
- Different energy modeling analyses can achieve a partial or full deduction rate. IRS Notice 2012-26 outlines the energy cost savings percentage that must be met to achieve a $1.80/SF deduction rate and the energy cost savings percentage that must be met per system to achieve a $0.60/SF deduction rate. Any combination of these analyses can be pursued as long as the total deduction rate for the building does not exceed $1.80/SF.
Example for property placed in services before 2022
A new 120,000 square foot building in placed in service in May 2021. Please see below the maximum deduction amount under 179D.
Analysis | Energy Cost Savings % Achieved | % Threshold Required | Deduction Rate | Deduction Amount ($) |
HVAC and Hot Water | 14.40% | 15% | $0/SF | $0 |
Interior Lighting | 26.20% | 25% | $0.60/SF | $72,000 |
Building Envelope | 11.80% | 10% | $0.60/SF | $72,000 |
Combination of HVAC/IL/BE | 45.30% | 50% | $0/SF | $0 |
| Total Deduction | $144,000 | ||
Properties Placed-In-Service in Tax Year 2023 and After:
· Minimum required savings in total annual energy and power cost lowered from a 50% reduction to a 25% reduction.
· The energy and power costs are now compared to the ASHRAE Reference Standard 90.1 that was in effect for (4) years prior to the in-service date of the building. Please see table below for applicable Ashrae 90.1 standard based on date placed in service.
Date Placed In Service | Applicable Reference Standard 90.1 |
Before 1/1/2015 | Reference Standard 90.1-2001 |
After 12/31/2014 and before 1/1/2027* | Reference Standard 90.1-2007 |
After 12/31/2026* | Reference Standard 90.1-2019 |
· Tax payers who begin construction before 1/1/2023 may apply reference standard Ashrae 90.1- 2007 regardless of when the building is places in service.
· The IRA provides higher 179D Deductions for meeting higher prevailing wage and apprenticeship requirements. If these thresholds are met, and the building achieves a 25% reduction in energy and power costs, the deduction is $2.50 per sq. ft. If energy and power costs are reduced further, the deduction increases by $0.10 for each additional percentage of reduction up to $5.00 per sq. ft.
· If the prevailing wage and apprenticeship requirements are not met, the 179D Deduction is $0.50 per sq. ft. for a 25% reduction. Further reductions increase the deduction by $0.02 per sq. ft., up to $1.00 per sq. ft.
· The IRA removes the lifetime limit defined in the previous provisions. The 179D Deduction can be taken every three tax years (four in certain situations) for subsequent energy efficiency improvements since the last 179D deduction claim. Previously, only public agencies were allowed to allocate the 179D Deduction.
· The IRA expands allocations to all tax-exempt entities, including charitable organizations, religious institutions, private schools or colleges; private hospitals, museums, tribal governments, and other organizations falling under IRC 501(c).
Prevailing Wage Requirements
• To qualify for the 179 D deduction and full investment Tax Credit (ITC), projects must satisfy the Treasury Department’s labor requirements: all wages for construction, alteration, and repair—for the first five years of the project for the ITC and the first ten years of the project for the Production Tax Credit (PTC)—must be paid at the prevailing rates of that location.[14] In addition, a certain percentage of the total construction labor hours for a project must be performed by an apprentice. The percentage increases over time, starting at 10% for projects beginning construction in 2022, 12.5% for projects beginning construction in 2023, and 15% for projects beginning construction after 2023.
• Projects can correct the prevailing wage requirements, if they were originally not satisfied, by paying the affected employees the difference in wages plus interest and paying a $5,000 fee to the Labor Department for each impacted individual. The apprenticeship requirements also can be satisfied if a good faith effort was made to comply or if a penalty is paid to the Treasury in the amount of $50/hour of non-compliance. Both penalties increase if the requirements are intentionally disregarded.
If you are interested to learn more how Energy Fave can help with 179D tax deduction Energy Modeling requirements for your building or if you have more questions about the whole 179D IRA, feel free to email us: [email protected]