179D Tax Deduction

179D Tax Deduction for Energy
Efficient Commercial Buildings

179D Tax Deduction

Section 179D is a provision in the U.S. tax code that was specifically designed to incentivize energy efficiency. It was enacted by the Energy Policy Act of 2005, and it provides a tax deduction for business property owners who make certain energy-efficient upgrades to their buildings. If a commercial or high-rise residential (4+ stories) building owner installs property improvements that reduce energy and power costs, they may be eligible for this tax deduction. The improvements can include better insulation, energy-efficient lighting, or heating, ventilation, and air conditioning (HVAC) systems that consume less energy.

The deduction is calculated based on the square footage of the building and the energy cost savings achieved by these improvements. It’s also worth noting that the Section 179D deduction is not just for building owners. Certain designers, such as architects, engineers, and contractors, can also take this deduction for public buildings, such as schools or government offices

As energy costs rise, reducing those costs is a priority for most public and private organizations. Source Advisors helps building owners and design firms understand and fully leverage this incentive.

The Energy Policy Act (EPAct) 179D tax deduction provides a deduction of up to $1.80/SF for the installation of systems that reduce the total energy and power costs by 50% in comparison to a building meeting minimum requirements set by ASHRAE Standard 90.1 for buildings Placed in Service in 2020 or prior.

For buildings Placed in Service in 2023, the building owners can potentially receive a full deduction up to $5.00/SF for installation of systems that can achieve a minimum of 25% energy savings in comparison to a building meeting minimum requirements set by ASHARE Standard 90.1.

This deduction amount ranges have been adjusted for inflation as follows:

2021

$0.61/sqft up to $1.82/sqft

2022

$0.63/sqft up to $1.88/sqft

2023

$2.68/sqft up to $5.36/sqft

Eligible building systems include the building envelope, interior lighting systems, heating, cooling, ventilation, and hot water system.

Date Placed In Service
Before 1/1/2015
After 12/31/2014 and before 1/1/2027
After 12/31/2026 and before 1/1/2029*
After 12/31/2028*

Applicable Reference Standard 90.1
Reference Standard 90.1-2001
Reference Standard 90.1-2007
Reference Standard 90.1-2019
Reference Standard 90.1-2022

*Taxpayers who begin construction before 1/1/2023 may apply Reference Standard 90.1-2007 regardless of when the building is placed in service.

Determining Eligibility Of The EPAct 179D Tax Deductions

Must be paying federal income tax.
The 179D deduction can be claimed for projects placed in service on or after January 1, 2006 by filing a Form 3115 or amending their tax returns.
For Designers: Firms structured as a pass-through entity, including S-Corps, LLCs, LLPs and partnerships, can take advantage of the EPAct 179D tax deduction up to the amount of shareholder “basis” or retained earnings.
For Designers: Deductions taken in excess of basis are exercised at a reduced amount.
For Designers: Past three tax years’ returns can be amended to claim the EPAct 179D deduction, potentially generating a refund from the IRS.

Selecting Projects: Energy-Efficient Tax Deductions Criteria

Includes new construction, renovations, and additions.
Before 2023, Non-profit buildings do not qualify. After 2023, tax-exempt owned buildings qualify.
For Designers: Projects in which your firm is primarily responsible for the design.
For Designers: Any government or municipal building located in the U.S. and substantially completed during the last 3 years’ filing periods can potentially qualify.

Which Buildings Qualify For 179D Tax Deductions?

Prior to 2023, to qualify for a full or partial deduction, the energy-efficient building must meet the following criteria:

Must have been placed in service since January 1, 2006.
Installation made is part of interior lighting systems, HVAC and hot water systems, and the building envelope.
Energy and power consumption calculations are based on IRS-approved software programs that compare the subject facility to an ASHRAE reference building.
Must be located in the United States.
Must be certified by an IRS-qualified professional engineer or contractor licensed in the same jurisdiction as the proposed building.
In addition, the IRS provides Interim Lighting Rules as an alternative method of evaluation. These rules allow a watts-per-square-foot calculation or a lighting-power-density calculation to be used in lieu of modeling when measuring energy efficiency.

If your design doesn’t meet the 50% energy savings, it could still qualify for a partial deduction if they meet the following criteria:

Lighting ≥ 25% = $0.60

HVAC ≥ 15% = $0.60

Envelope ≥ 10% = $0.60

25% to 40% = $0.30 to $0.60

In addition, the IRS provides Interim Lighting Rules as an alternative method of evaluation. These rules allow a watts-per-square-foot calculation or a lighting-power-density calculation to be used in lieu of modeling when measuring energy efficiency.

After 2022, to qualify for a full or retrofit deduction, the energy-efficient building property must meet the following criteria:

Full Building Qualification:

If prevailing wage and apprenticeship requirements are met: Deduction increases to $2.50 per square foot with 25% energy savings. The deduction increases by $0.10 per square foot for every percentage increase until it reaches $5.00 per square foot with 50% energy savings; prevailing wage and apprenticeship requirements must be met.
If prevailing wage and apprenticeship requirements are not met: The tax deduction is $0.50 per square foot for 25% savings and $1.00 per square foot for a reduction of 50 percent.

Efficiency Gain Over Baseline
25% (minimum)
30%
35%
40%
50% (maximum)

Deduction Amount "Base Rate"
50 cents per ft²
60 cents per ft²
70 cents per ft²
80 cents per ft²
$1.00 per ft²

Labor Standards "Bonus Rate"
$2.50 per ft²
$3.00 per ft²
$3.50 per ft²
$4.00 per ft²
$5.00 per ft²

Retrofit Projects

This alternative deduction is based on reduction in energy use intensity of the existing building.
A minimum of 25% savings should be achieved using the established retrofit plan, which is certified by a professional engineer or registered architect.
The deduction is limited to buildings originally placed in service at least 5 years before the qualified retrofit plan is established.
Retrofit deduction can only be claimed by the taxpayer after the equipment is in service for at least one year and the project results in anticipated EUI reductions.
Architect/engineer must make a “final certification” of EUI one year after the retrofit plan is implemented to show the efficiency gain.

Building Types That Are Excluded From Section 179D:

Single-family homes.
Multi-family residential buildings of three or fewer stories above grade.
Manufactured homes.
Buildings without fossil fuel or electricity use.
Cold Storage Building (if they are mostly for refrigeration).

Frequently Asked Questions

What documents are required if my business performed §179D work on a government-owned building?

You would need to obtain an allocation letter from that government entity that transfers the Section §179D benefit directly to you. At Source Advisors, our team handles this process from start to finish on your behalf.

How do I claim my §179D deduction?

To claim your §179D deduction, the IRS requires your energy-efficient building must be certified as installed as part of a plan designed to reduce the total annual energy and power costs by 50% or more.

Do LED lights qualify for §179D tax credit?

Yes, according to The Energy Policy Act of 2005, LED lighting qualifies for the §179D tax deduction. The tax deduction varies linearly from $0.30 per square foot at 25% lighting power density reduction (LPD) to $0.60 per square foot at 40% lighting power density reduction (LPD). The LPD reduction is determined by comparing with ASHRAE 90.1 standards. For warehouses, this requirement increases to a 50% LPD reduction.

Lighting systems must include automatic controls prescribed in the ASHRAE 90.1 standard and a provision for bi-level switching in all spaces except hotel and motel guest rooms, storerooms, restrooms, and public lobbies. The illuminance levels must meet the minimum requirements as per the IESNA lighting handbook.

Which types of HVAC and/or plumbing qualify for §179D?

The types of potentially qualifying systems or system components include:

Geothermal heat pumps, high efficiency chillers (generally 0.4 kW/ton or lower).
Chilled beams.
Condensing boilers with efficiencies greater than 90%.
Energy recovery units.
Water side economizers.
Cogeneration (not common, but advantageous if available).
Instantaneous hot water heaters.
Heat exchangers taking advantage of high efficiency boilers to provide service hot water.
High efficiency motors with VFDs.
If HVAC upgrades are being considered, a full system retrofit is almost always required.

What are the considerations for the §179D Building Envelope?

Building Envelopes are the most difficult systems to predict for Section §179D.

It is beneficial to keep these considerations in mind:

Building Envelopes are affected by many variables.
Climate zone and building area have a large impact.
Building geometry and orientation.
Number of floors, surface area to volume ratio.
Glazing percentages and R-values at roof and walls.
Typical minimums seen on potentially qualifying buildings.
Effective R-values of R-30 at roof and R-19 at walls.
Double paned, Low-E glazing on windows.
Envelope has the greatest impact in colder climates.
Very high quality envelopes in hot climates might qualify, but impact is typically much lower in hot.
Climates compared to colder climates.
Envelope typically has little to no impact in temperate climates.

What are other factors to consider under §179D building modeling?

Building Envelopes are the most difficult systems to predict for Section §179D.

It is beneficial to keep these considerations in mind:

Solar panels and wind turbines are not considered when modeling for §179D deductions.
Only building systems are considered in the model. Exterior site lighting is not included in the model.
Miscellaneous (receptacle) loads are removed from the building energy usage.
When only modeling a single system (i.e.; lighting, HVAC, or envelope) the other systems are placed at ASHRAE 90.1-2001 baselines.*
Occupancy/Equipment schedules are from California Title 24.

Who are the ideal candidates for §179D?

Designers (Architect, Engineer, Environmental Consultant, or Contractor) responsible for the design and specification of public (government-funded) building projects.
Commercial Building Owners.

Do government-owned buildings qualify for §179D?

Yes, government-owned buildings at the local, state, and federal level might qualify for Section §179D tax deduction. These buildings include: Schools, post offices, state universities, libraries, town halls, institutions, government offices, courthouses, military bases, airports, and transportation facilities.

179D Tax Deduction