» 179D Energy Efficient Building Deduction

Overview

Tax Incentive for Developers, Investors, and Designers of Energy Efficient Buildings

The 179D Federal Tax Deduction allows a tax deduction of up to $1.80 a square foot for energy-efficient building improvements and new building construction. This deduction is available to taxpayers who build new assets or make upgrades to their lighting, insulation, or HVAC systems. Owners can allocate the deduction to architects, engineers, and other government building designers.

Congress Made 179D Permanent

The Consolidated Appropriations Act of 2021, signed into law on Dec. 21, 2020, made the 179D Energy Efficient Building Deduction permanent, and added an annual inflation adjustment, allowing the $1.80 per square foot deduction to increase over time. This program was initially enacted as part of the 2005 Energy Policy Act (EPAct) to incentivize taxpayers to design and improve properties for energy efficiency.

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Qualification Requirements

Energy-efficient property must reduce energy costs by at least 50 percent or more in comparison to the minimum requirements of the ASHRAE Standard
The deduction cannot exceed the cost of the qualifying property.
The depreciable basis of the property is reduced by the amount of the current deduction.

Benefits

To earn the full deduction, energy-saving measures must address all three of the following building components:

The interior lighting system
The heating, cooling, ventilation and hot water systems
The building envelope, including windows, walls, foundations, slabs, ceiling, roof system, and insulation

See Examples

Partial Deductions

If the 50% savings is not met, a partial deduction of up to $.60 per square foot is available for the cost of energy-saving improvements to any of the systems (Lighting, HVAC, or Building Envelope).

Size	LED Lighting	HVAC	Envelope	Max Deduction
(in sf)	($0.30/sf to $0.60/sf)	($0.60/sf)	($0.60/sf)	($1.80/sf)
50K sf	$15K – $30K	$30K	$30K	$90K
300K sf	$90K – $180K	$180K	$180K	$540K
500K sf	$150K – $300K	$300K	$300K	$900K

Note: 25% to 40% reduction in lighting power density (50% in case of warehouses)

Earning the Maximum Deduction

Not all energy-efficient improvements qualify. It’s important to seek advice early as maximizing the 179D deduction is all about design. Additionally, there may be other incentives or strategies available to further enhance benefits for the same project, resulting in a greater ROI, and reduced payback period.

What is the Timeframe to Claim the Deduction?

Taxpayers can take the 179D deduction for the placed-in-service year.
There are different filing requirements to take the deduction in the tax years after the property is placed in service.
- Building owners and tenants may use Form 3115, Change in Accounting Method, to retroactively take the deduction in prior years
- Eligible designers or builders of government-owned buildings have to amend their tax returns to take the deduction. Hence, they can only file for open tax years, generally three years from the date of filing.

Get Started

A no-cost feasibility analysis can illustrate how the Energy Efficient Building Deduction can benefit you.

Meridian’s team of engineers and tax professionals can develop and support your deduction by conducting a detailed engineering analysis, including energy simulation modelling or lighting power density calculations as required by the IRS.