Energy Tax Deduction 179D Set to Expand in 2023

The Inflation Reduction Act of 2022 was signed into law on Aug. 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 companies have benefited from 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. 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.

With the passage of the Inflation Reduction Act, companies now are positioned to monetize the 179D deduction in a greater capacity than ever before.

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 firm(s) 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); and firms designing lighting, HVAC and envelope systems. 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, Department of Public Works 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 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. This is a significant increase from the 2022 maximum deduction level of $1.88 per square foot. 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. This includes private schools and universities, non-profit hospitals, places of worship and museums.
  • Deduction reset—Historically, the maximum 179D deduction can be taken once over the life of the building. With the passage of the Inflation Reduction Act of 2022, 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 FootageMinimum Deduction Level ($2.50 Per Square Foot)Maximum Deduction Level ($5 Per Square Foot)
50,000$    125,000$    250,000
100,000$    250,000$    500,000
250,000$    625,000$ 1,250,000
500,000$ 1,250,000$ 2,500,000
1,000,000$ 2,500,000$ 5,000,000

Quicker Payback

With the passage of the Inflation Reduction Act, companies now are 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 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 increase cash flow and provides greater flexibility.

About the Author

Charles R. Goulding, CPA, and Raymond Kumar, CPA
Charles R. Goulding is an attorney, certified public accountant and president of Energy Tax Savers, Syosset, N.Y. Raymond Kumar, CPA, is the firm's tax manager.

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