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179D Epact Tax Deduction

Overview

The Energy Policy Act of 2005 (EPAct) created the Energy-Efficient Commercial Building Tax Deduction, also known as the 179D deduction. This tax incentive encourages developers to construct commercial buildings that are energy efficient. Additionally, an update in the Inflation Reduction Act incentivizes taxpayers to pay fair wages and hire apprentices for commercial construction projects.

Engineered Tax Services (ETS) has provided thousands of Energy Policy Act tax certifications since 2005. Managing over 100 certifications every month, we have perfected the process by working closely with the IRS. Our precise documentation meets and exceeds the standards required by the Department of Energy and the IRS, and it has consistently withstood the toughest scrutiny.

Inflation Reduction Act Update

Signed into law on August 16, 2022, the Inflation Reduction Act (IRA) extended and updated 179D. One of its major changes has been the introduction of a “bonus rate” for projects meeting labor standards. Additionally, energy-savings requirements were altered to make them more achievable against the updated ASHRAE standards. Retrofit rules have also been updated to reflect the unique circumstances of renovation projects.


What Are the Requirements?

Since the primary goal of the 179D EPAct tax deduction is to incentivize energy-efficient construction, its main requirement is that commercial buildings demonstrate energy efficiency. With the introduction of prevailing wage and apprenticeship provisions in the IRA, 179D also now incentivizes favorable labor practices.

Pre-2023

Prior to the 2023 tax year, qualifying buildings must abide by either (1) ASHRAE 90.1-2007 or (2) the standard affirmed two years prior to the start of construction. The 179D deduction may only be claimed once per qualifying building.

2023 and Later

Beginning in the 2023 tax year, qualifying buildings must abide by either (1) ASHRAE90.1-2007 or the standard affirmed four years prior to the completion of construction. The IRA also introduced prevailing wage and apprenticeship provisions. If contractors meet these optional requirements, they may be eligible for a 5x multiplier on their 179D deduction amounts.

Because the IRA updated retrofit requirements, it is now possible to claim 179D more than once for a single building. However, the building must be at least three years old and meet all retrofit requirements to qualify.


What Types of Buildings Qualify?

Pre-2023

  • Commercial buildings (any size)
  • Residential buildings (4 stories or more)
  • Governmental buildings

2023 and Later

  • Commercial buildings (any size)
  • Residential buildings (4 stories or more)
  • Governmental buildings
  • Buildings owned by not-for-profit organizations
  • Houses of worship
  • Buildings owned by Tribal organizations
  • Not-for-profit schools and universities

Do Retrofits Qualify for 179D?

Retrofits have always qualified for the 179D deduction, but the Inflation Reduction Act provides an optional alternate means of certification to make them easier to claim in 2023 and beyond.

Pre-2023

Claiming the 179D deduction for retrofits in tax years prior to 2023 had options of partial systems certification along with interim rules for lighting retrofit projects.

2023 and Later

The biggest change for retrofits in the IRA is the removal of the partial system certification and interim rules. From 2023 onward, a whole building analysis may be attempted, or the alternative retrofit plan can be pursued. The retrofit plan sets the baseline as the building’s own pre-retrofit site energy use intensity (EUI) in the year prior to project completion.

The 179D deduction may only be claimed after the building has been in service for one year and the results of the plan are achieved and verified.


How Much Is the 179 Energy Policy Act Deduction Worth?

The value of 179D is calculated based on the square footage of the commercial property. Prior to 2023, the square footage of individual systems could also be used to calculate 179D deductions. Beginning in 2023, 179D deductions will be available on a sliding-scale basis.

Pre-2023

The value of 179D deductions claimed prior to 2023 is calculated at $1.80 per square foot for the entire building, plus an inflation adjustment. Alternatively, the value may be calculated at $0.60 per square foot for qualifying subsystems, plus an inflation adjustment. Qualifying subsystems include:

  • Interior lighting
  • HVAC and hot water systems
  • The building envelope

What Are Partial Deductions?

If a building is unable to meet 50% energy savings as a whole, then each subsystem (HVAC, lighting and envelope) can be analyzed individually in an attempt to meet a $0.60 per square foot deduction. Lighting is the only component that can qualify on a sliding scale for the deduction as per the interim rules. Depending on the reduction of Lighting Power Density (LPDs), the owner/designer can qualify for a deduction of $0.30–$0.60 per square foot. Lighting is dependent on square footage, building type, bi-level switching and energy consumption. There are also multiple ways for a property to qualify based on the code revisions. Please contact us to receive a complimentary energy review of your project.

2023 and Later

Provisions in The Inflation Reduction Act of 2022 make calculating the value of 179D more complicated, but they also enable taxpayers to achieve significantly higher deductions. The amount of the deduction is determined by (1) the percentage of energy efficiency gained over baseline and (2) the optional adherence to prevailing wage and apprenticeship requirements. 25% is the minimum savings needed to achieve the deduction, and 50% is the maximum. This is represented in the table below.

25% $0.50 per square foot $2.50 per square foot
30% $0.60 per square foot $3.00 per square foot
35% $0.70 per square foot $3.50 per square foot
40% $0.80 per square foot $4.00 per square foot
50% $1.00 per square foot $5.00 per square foot

What Are the Prevailing Wage Requirements?

Starting in the 2023 tax year, taxpayers that meet optional prevailing wage (and apprenticeship) requirements will be eligible for higher 179D deductions.

Prevailing wages are the average wage a specific type of employee could expect to earn in a specific area. Due to differing costs of living, prevailing wages vary state-by-state and region-by-region.

A list of prevailing wages may be found at www.sam.gov. Taxpayers wishing to request prevailing wages for job titles and geographic locations not included on this site should email IRAprevailingwage@dol.gov. Further guidance regarding prevailing wage requirements is included in IRS Notice 2022-61.

What Are the Apprenticeship Requirements?

In order to achieve increased (“bonus rate”) 179D deductions, taxpayers must abide by both prevailing wage and apprenticeship requirements. Contractors or subcontractors that employ four or more individuals are required to employ at least one qualified apprentice.

Apprenticeship requirements will increase over a three-year period, as outlined in the chart below.

Note: 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 if the program fails to respond within five days of the request. IRS Notice 2022-61 contains additional information about the “good faith effort” exception.

Construction beginning in 2022 10% of labor hours must go to an apprentice
Construction beginning in 2023 12.5% of labor hours must go to an apprentice
Construction beginning in 2024 and after 15% of labor hours must go to an apprentice

Who Can Claim the 179D Deduction?

Pre-2023

  • Commercial building owners
  • Owners of 4+ story residential buildings
  • Designers of buildings owned by government entities

2023 and Later

  • Commercial building owners
  • Owners of 4+ story residential buildings
  • Designers of buildings owned by:
    • Government entities
    • Not-for-profit organizations
    • Churches and other religious organizations
    • Tribal organizations
    • Not-for-profit schools and universities

REIT Update

Per the Inflation Reduction Act, the 179D deduction amount now reduces earnings and profits (E&P) in the year that the energy-efficient components are installed. E&P reduction is no longer ratable over a five-year period. Because of this, REITs and their shareholders can now receive a fuller and more immediate financial benefit by claiming the 179D deduction.


Why Use Engineered Tax Services for Your Energy Certification?

Since the Energy Policy Act of 2005 (EPAct) was enacted, ETS has been at the forefront of the energy accreditation and related tax benefits field. We speak regularly before national and regional energy groups and work closely with the IRS on evolving energy-related issues. We have been retained by some of the country's leading CPA firms to provide services to their clients. In addition, we have worked directly with several Fortune 500 companies as well as some highly recognizable brands, including Google, IKEA and MSNBC. Our technical expertise in energy accreditation is unmatched.

We effectively marry the sciences of engineering and accounting through our utilization of exceptional tax and accounting professionals as well as licensed engineers.

ETS engineering professionals have over 100 years of combined experience in energy modeling. The ETS engagement team includes multidisciplinary professionals such as professional engineers, LEED-accredited professionals, CPAs and architectural professionals. Our collaborative and proactive approach has made us the leading provider of energy tax services. Through strategic partnerships, we work in tandem with CPA firms, architectural firms, contractors and attorneys.

We perform engineering-based specialty tax services for firms of all sizes around the country, resulting in considerable tax savings for their clients. Through a partnership with ETS, you'll benefit from having professional, licensed engineers who possess the specific expertise to perform accurate, thorough and compliant engineering-based specialty tax services—with little or no capital investment from your firm.

Top 10 ETS Energy Advantages

  1. Our multidisciplinary expertise and vast, specialized experience enable us to deliver unmatched quality and continuum of service.
  2. We understand the IRS technical issues involved in energy tax incentives, including the benefit of donating the savings from public buildings to designers.
  3. Nationally sought, we have been asked to participate in local, regional and national conferences by making presentations to share our knowledge and expertise.
  4. We have LEED-accredited professionals on staff.
  5. All our reports are forensic, fully insured and provide audit defense
  6. ETS is approved by NASBA and the USGBC to provide continuing professional education (CPE and CE) on energy topics.
  7. We are nationally published and recognized as experts.
  8. ETS is a member of ASHRAE and the USGBC.
  9. We have been engaged by the Los Angeles Community College District to certify over 250 buildings to benefit the local stimulus.
  10. We have worked with Fortune 500 companies, Top-100-ranked accounting firms, national real estate firms, international architects and many of the top lighting firms in the country.

FAQs


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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-eff

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.

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.

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.

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.

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.

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.

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