179D Epact Tax Deduction

Pre-2023: By claiming a Section 179D deduction, a taxpayer can receive a deduction of as much as $1.80 (plus an inflation adjustment) per square foot of their commercial building if they make efficiency improvements above certain energy thresholds.

2023 and Later: The 179D deduction allows building owners, REITs, architects, designers, engineers, and construction companies to claim up to $1.00 per square foot for energy-efficient buildings and up to $5.00 per square foot (plus an inflation adjustment) for energy-efficient buildings that meet labor standards.

Yes. The Section 179D deduction can be allocated to engineering, architecture, and construction entities responsible for the design components of government-owned, energy-efficient buildings.

Since the owners of these public buildings are nontaxable entities, the deduction goes to the primary designers of the buildings—the engineering, architecture, and construction entities that qualify as designers. The deduction incentivizes designers of government-owned buildings to utilize energy-efficient systems and components within construction projects.

An entity is considered responsible for the building’s design components if it creates a building’s technical specifications. Any entity that installs, repairs or maintains a property is not considered a designer for the purposes of this deduction.

No. If you claim the deduction as a designer of government-owned buildings, it won’t automatically trigger an audit from the IRS, but you must follow the right steps to determine qualification for the deduction.

The IRS Large Business and International division (LB&I) has created a Section 179D practice unit to provide a framework for designers who might be eligible to take the deduction. The Section 179D IRS practice unit has released a document that outlines the steps the IRS would take when auditing Section 179D studies.

Your company should claim the deduction in the same tax year as when the building is placed in service, but by filing an accounting method change, building owners can retroactively claim the deduction as far back as the 2006 tax year.

Unlike building owners, if an architecture, engineering, or construction entity misses the deduction on a current-year tax return, they must file an amended return to receive the deduction. A significant administrative burden can result, especially if an entity needs to retroactively claim the deduction for multiple years.

If you think your company could qualify for the Section 179D deduction, it’s important to act quickly, since only a finite amount is available for each project. The designer should receive a signed allocation letter from the government entity; it must be signed by someone within the government entity with the authority to do so.

If you’re a building owner, you should report the Section 179D deduction under the “Other Deductions” line item for the applicable tax year. If filing before 2023, you should also reduce the property’s tax basis by the amount of the deduction.

Designers such as architects, engineers or contractors who are allocated the deduction for government-owned property should also report the deduction as a line item under other expenses for the applicable tax year. Designers don’t need to recognize gross income or reduce future deductions by the amount the Section 179D deduction allocates.

Pre-2023: IRC Sec. 179D lets building owners and eligible designers/builders claim a tax deduction of up to $1.80 per square foot for installing qualifying energy-efficient systems and buildings. Tenants may be eligible if they make the construction expenditures. The tax deduction applies to both new construction and retrofits. Qualified buildings include:

• Commercial buildings, including warehouses and parking garages
• Multifamily properties with four stories or more
• Government-owned buildings, such as public universities, libraries, etc.

To qualify, the energy-efficient property must reduce the energy and power costs of a building located in the United States by 50% or more in comparison to the minimum requirements of ASHRAE Standard 90.1. If the 50% target saving isn’t met, you can get a partial deduction of $0.60 per square foot for each of the following components:

• Interior lighting systems meeting 25% savings
• Heating, cooling, ventilation, and hot water systems meeting 15% savings
• Building envelope meeting 10% savings

The deduction cannot exceed the cost of qualifying property. There is also alternative guidance for partially qualifying properties known as the Interim Rule.

If a deduction is allowed under IRC Sec. 179D with respect to the energy-efficient property, the basis of such property will be reduced by the amount of allowed deductions.

2023 and Later: IRC Sec. 179D lets building owners, REITs and eligible designers/builders claim a tax deduction of up to $5.00 per square foot for adhering to labor standards when building energy-efficient properties. Tenants may be eligible if they make the construction expenditures. The tax deduction applies to both new construction and retrofits. Qualified buildings include:

• Commercial buildings, including warehouses and parking garages
• Buildings owned by not-for-profit entities
• Multifamily properties with four stories or more
• Government-owned buildings, such as public universities, libraries, etc.

To qualify, the energy-efficient property must reduce the energy and power costs of a building located in the United States by 25% or more in comparison to the minimum requirements of ASHRAE Standard 90.1. Construction projects meeting labor standards can increase their tax deduction by as much as 5x. The deduction cannot exceed the cost of qualifying property. 

If a deduction is allowed under IRC Sec. 179D with respect to the energy-efficient property, the basis of such property will not be reduced by the amount of allowed deductions.

The Energy Policy Act of 2005, EPAct, created the Energy-Efficient Commercial Building Tax Deduction; it recognizes that commercial buildings are responsible for a substantial portion of U.S. energy consumption. It provides building owners with a tax incentive to help offset the costs associated with enhancing the energy efficiency of commercial buildings. 

Pre-2023: Taxpayers can receive a tax deduction of $0.60 per square foot for energy-efficient lighting, HVAC and building envelope systems, with a maximum of $1.80 per square foot for qualifying energy-efficient commercial buildings.

2023 and Later: The 179D deduction operates on a sliding scale, with its value increasing as taxpayers achieve higher levels of building efficiency. Buildings meeting minimum standards of 25% efficiency gains qualify for a deduction of $0.50 per square foot, with each percentage point increase in building efficiency correlating to a two-cent increase in the deduction amount. The deduction can increase even more (up to $5.00 per square foot) if the construction project meets labor standards.

Do public buildings qualify for this tax deduction?

IRS guidelines issued in 2008 allow public entities to allocate the deduction to the person primarily responsible for designing the technical specifications of the property.

Does the 179D tax deduction apply to existing buildings as well as new construction?

Pre-2023: Yes. The historical performance of existing buildings is not used in the energy savings calculations for the tax deduction. Like newly constructed buildings, retrofits and upgrades are measured against reference building models for determining the energy and power cost savings. These models are based, like those for new construction, on ASHRAE Standard 90.1.

2023 and Later: Yes. Buildings must be at least five years old to qualify. The energy usage baseline for retrofits and upgrades has been changed to the building’s own pre-retrofit site energy usage intensity (EUI). A qualified retrofit plan must be put in place and then evaluated one year after the building is put back in service to obtain final certification.

Are partial deductions allowed for building subsystems instead of a whole-building deduction?

Pre-2023: If a building doesn’t meet the whole-building requirement of 50% energy savings, a partial deduction is allowed for each separate building system that comprises the property; it must be certified by a qualified professional as meeting or exceeding the applicable system savings targets.

The savings targets are those that would result in total annual energy savings of 50% for the whole building, providing that each of the separate systems met the system target. The maximum allowable deduction for each subsystem is $0.60 per square foot.

The separate building systems are:

• Interior lighting systems
• Heating, ventilation, cooling and hot water systems
• Building envelope

As of March 2012, the subsystem targets are 25% for interior lighting, 15% for HVAC and hot water and 10% for the building envelope.

2023 and Later: 179D no longer allows for partial deductions for building subsystems.

Pre-2023: The interim lighting rule applies to properties where the installed lighting power density is reduced at least 25% below ASHRAE Standard 90.1. The tax deduction varies linearly from $0.30 per square foot at 25% savings to $0.60 per square foot at 40% savings. Warehouses are required to be 50% below Standard 90.1. Lighting controls must comply with the mandatory and prescriptive requirements of Standard 90.1; they must include a provision for bi-level switching in all spaces, except hotel and motel guest rooms, storerooms, restrooms, and public lobbies. Illuminance levels must meet the minimum requirements as set forth in the IESNA Lighting Handbook.

Pre-2023: Bi-level switching is required when you use the interim rule, but not when lights are completed using energy modeling procedures.

2023 and Later: 179D no longer contains the lighting subsystem provision.

Buildings that don’t use electricity or fossil fuel, single-family homes, multifamily buildings with three or fewer stories and manufactured houses do not qualify.

A list of all DOE-approved modeling programs can be found here 

Yes. If two or more taxpayers participate in tax-deductible activities on or in the same building, both taxpayers may claim deductions. However, the aggregate amount of the Section 179D deductions allowed can’t exceed the allowable amount for the specific tax deduction.

Not all tax professionals are aware of Section 179D benefits. Your tax preparer must follow all the guidelines as prescribed in the IRS Notices and employ (or act as) an independent third-party certifier.

You can take a tax deduction for a project placed in service on January 1, 2006 and after. Since the deduction has been made permanent, all current and future projects are eligible for the tax deduction. 

Note: A technical designer can only take a tax deduction for an allocated project completed within three years of filing their latest federal tax return.

Because qualification for the tax deduction is based on the building’s predicted energy performance, the predicted levels must meet the specified savings levels.

The tax deduction is the lower of (1) the value of the asset or (2) the value of the allowable tax deduction. The deduction cannot be for more than the amount spent on the equipment and associated installation labor.

Pre-2023: You can’t claim credit for renewable electricity, and you shouldn’t include renewably generated electricity in calculations or simulations.

2023 and Later: Renewable energy may work toward achieving overall efficiency gain requirements, but we are still waiting on further clarification from the IRS to confirm this.

Pre-2023: The taxpayer would have to meet the partial qualifying property requirements of the permanent rule. According to the permanent rule, the required 20% reduction from a Reference Building based on Standard 90.1 must be accomplished solely through energy and power cost reductions for the interior lighting systems.

2023 and Later: 179D no longer contains partial improvement provisions.

Since Standard 90.1 doesn’t cover buildings that are mostly refrigeration, the cold storage building would fall outside the scope of 179D tax deductions.

Pre-2023: 179D does not have prevailing wage requirements for tax years prior to 2023.

2023 and Later: Prevailing wages are simply the average wages that a particular type of employee could expect to receive in a particular area. Taxpayers can obtain higher tax deductions by meeting prevailing wage requirements. A list of official prevailing wages can be found on www.sam.gov. The IRS has also released a notice containing further information on prevailing wage.

Pre-2023: 179D does not have apprenticeship requirements for tax years prior to 2023.

2023 and Later: In order to obtain the highest possible deduction, taxpayers, contractors or subcontractors that employ four or more individuals are required to employ at least one qualified apprentice. The number of apprentices required per project will increase over time:

• Construction started in 2022: 10% of labor hours must go to an apprentice
• Construction started in 2023: 12.5% of labor hours must go to an apprentice
• Construction started in 2024 or later: 15% of labor hours must go to an apprentice

Taxpayers can be deemed as satisfying the requirement if they make a good faith effort to request qualified apprentices from a registered apprenticeship program and their request is denied or the program fails to respond within five days of the request.

Pre-2023: 179D does not allow for a “bonus rate” in tax years prior to 2023.

2023 and Later: Taxpayers, contractors or subcontractors that meet prevailing wage and apprenticeship requirements can qualify for a 5x multiplier on their achieved energy-efficient building deductions. 

Pre-2023: 179D does not have labor requirements for tax years prior to 2023.

2023 and Later: Yes. Projects that do not meet labor requirements are still eligible for 179D tax deductions. However, the amount of the deduction will be significantly less than that of a project that does meet labor requirements.