Energy Tax Deduction 179D Benefit Increase to Expand in 2023

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The Inflation Reduction Act (IRA) of 2022 was signed into law on August 16, 2022, after passing votes in Congress. Among the provisions included in this bill is the expansion of the Section 179D tax deduction for building energy efficiency.

Thousands of designers and building owners have utilized the 179D tax deduction since its inception in 2005, and this expansion potentially allows for many more to not only utilize the deduction but also claim larger amounts than previously available.

Section 179D Overview

Under the Energy Policy Act (EPAct) of 2005, Section 179D allows for energy efficient investments in new and existing buildings to qualify for immediate tax deductions up to $1.88 per square foot for the 2022 tax year.

Eligible projects include those related to interior lighting, HVAC and building envelope. The 179D deduction was made permanent as part of the Consolidated Appropriations Act of 2021.

Owners of commercial buildings can utilize the 179D deduction for building projects completed since Jan. 1, 2006. Owners in all major building categories are utilizing the deduction, including warehouse, industrial, retail, office, hospitality and restaurant chains.

A unique provision under 179D relates to government buildings, as the design party or parties responsible for the energy efficient design can take the tax deduction for federal, state and municipal building projects.

Eligible designers include: architects, engineers, design and build firms, energy service companies (ESCOs), lighting design firms, mechanical design firms and envelope design firms.

Common government building types include:

  • Federal — offices, military bases, courthouses, post offices, VA hospitals
  • State — offices, transportation facilities, state universities, courthouses, hospitals
  • Municipal — offices, K-12 public schools, town halls, police and fire stations, libraries, parking garages, DPW facilities
2023 Updates to Section 179D

The Inflation Reduction Act of 2022 includes numerous updates to the 179D deduction, which are due to take effect on Jan. 1, 2023.

Notable updates include:

  • Deduction levels up to $5.00 per square foot — The qualified deduction range for projects meeting prevailing wage and apprenticeship standards will be between $2.50 and $5 per square foot, depending on the building’s energy efficiency level. For projects that do not meet prevailing wage and apprenticeship standards, the deduction level range will be between $0.50 and $1 per square foot.
  • Inclusion of not-for-profits, instrumentalities and Tribal Government buildings — Designers of energy systems in these buildings are now allowed to claim the 179D deduction for qualifying projects.
  • Deduction reset — Currently, the maximum 179D deduction can be taken once over the life of the building. With the passage of this Act, the maximum deduction would now be available every three years on a commercial building and every four years on a government, instrumentality, not-for-profit or Tribal Government building.
Increased 179D Deduction Levels
For Energy Efficient Projects Meeting New Standards

Building Square Footage

  • 50,000
  • 100,000
  • 250,000
  • 500,000
  • 1,000,000

Minimum Deduction Level ($2.50 Per Square Foot)

  • $125,000
  • $250,000
  • $625,000
  • $1,250,000
  • $2,500,000

Maximum Deduction Level ($5.00 Per Square Foot)

  • $250,000
  • $500,000
  • $1,250,000
  • $2,500,000
  • $5,000,000
What This Means for Your Accounting Clients

Essentially, there are more ways for taxpayers to save on energy efficient designs now.  Architecture and Engineering (A&E) clients and retrofitters that specialize in tax-exempt building projects can now receive tax benefits for their design categories that include nonprofit schools and universities, churches and temples, museums, charities and nonprofit hospitals. The reach is wider than ever, and the tax deduction savings can be substantial.

With the passage of the Inflation Reduction Act, companies are now positioned to monetize the 179D deduction in a greater capacity than ever before. The increased deduction levels lead to a quicker payback and improved return-on-investment (ROI) for building owners who are considering installing energy efficient equipment.

For designers, the deduction can now be used on energy efficient designs for non-profit, instrumentality and Tribal government buildings. The increase in potential tax savings allows companies to fuel further energy efficient upgrades and improvements.

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