The energy efficient commercial buildings deduction under Section 179D of the Internal Revenue Code (IRC) provides taxpayers with an incentive to make certain commercial buildings more energy efficient. This article will explain recent changes to this deduction, go over what types of buildings can apply for it, and go over other important details related to energy efficiency incentives for commercial properties. 

The 179D Tax Deduction 

The Inflation Reduction Act of 2022 expanded IRC Section 179D. Under the section, building owners can claim tax deductions to offset some of the costs of new equipment they install to improve energy efficiency. Eligible improvements include: 

• Interior lighting. 

• HVAC. 

• Hot water systems. 

• Building envelopes. 

How Much is the 179D Tax Deduction Worth? 

The amount of the deduction varies depending on when the owner placed a property in service. For example, if this took place in or after 2023, the deduction equals the lesser of the cost of the installed property or the savings per square foot. 

Who Can Claim the 179D Tax Deduction? 

The deduction is available to owners of qualified commercial buildings and buildings owned by specified tax-exempt entities. The deduction was previously available only to owners of qualified commercial buildings and retrofits installed in buildings owned by certain government entities. However, the Inflation Reduction Act has expanded eligibility so more building owners can access the tax benefit. 

What Types of Buildings Qualify for the Deduction? 

There are four categories of buildings that can qualify for the efficient commercial buildings’ deduction. They are: 

Commercial Buildings 

Various commercial buildings are eligible for the 179D deduction. There are standard eligible commercial buildings and two categories of efficient commercial buildings. These include: 

• Energy Efficient Commercial Building Property (EECBP): This covers energy efficient property installed in new buildings. 

• Energy Efficient Commercial Building Retrofit Property (EEBRP): This covers energy efficient property installed in existing buildings, provided the building originally entered service at least five years before the retrofit plan was established and is located in the U.S. 

Government Buildings 

Certain government buildings can qualify for the 179D tax deduction. However, due to their tax-exempt status, government entities themselves cannot directly claim the deduction. Instead, they can allocate the deduction to the designers of the EECBP installed in their building. 

Nonprofit and Tax-Exempt Organization Properties 

Tax-exempt building owners can also qualify for these tax savings. This covers certain government entities, Indian tribal governments, Alaska Native Corporations, and other tax-exempt organizations. 

New Constructions vs. Retrofits 

A commercial building owner planning a new construction can qualify for the tax incentive via the EECBP. Building owners of previously developed real estate can access significant tax deductions through the EEBRP if they install energy efficient systems. 

Whether it’s through construction of an energy efficient building or the installation of an energy efficient improvement, a commercial building owner can benefit from the tax deduction and energy savings. 

How Do Energy Efficiency Upgrade Incentives Work? 

There’s a popular saying in both energy and environmental circles. It goes something like this: “The cheapest kilowatt hour is the one not used.” The point being, even if you source your energy from 100% renewable sources, nothing will be as inexpensive and environmentally friendly as simply not using energy at all. Therefore, no efficiency or sustainability campaign will succeed without eliminating energy waste. 

Incentivizing efficiency upgrades has had success in lowering energy consumption and making progress toward carbon reduction goals.  One study found “that for a typical deep retrofit project … [incentivization] strategies could result in a total installed cost reduction of nearly 50%, dramatically improving the customer economics of such a project.” These retrofits include heat pumps and envelope upgrades. 

Compliance Pathways for the 179D Deduction 

EnerConnex offers services to help achieve eligibility for the 179D deduction. With our extensive industry knowledge and experience, coupled with our expert use of advanced technological solutions, we help organizations achieve their energy goals. Whether that’s strengthening their energy budget strategies with deductions and efficiency boosts or increasing sustainability, our services have helped a plethora of businesses. 

How To Apply for the Energy Efficient Commercial Buildings Deduction 

The IRS requires property owners to use a qualified software program to model energy usage. Here, you can see a list of qualified software for calculating energy savings.  

The application process isn’t always simple, and neither is determining eligibility. EnerConnex can help you figure out how to apply and get the right deduction for your building. 

FAQs About Energy Efficiency Standards 

Here are some frequently asked questions about energy efficient commercial buildings deductions: 

What Is the 7205 Energy Efficient Commercial Buildings Deduction? 

Form 7205 is the IRS form building owners can use to claim the Energy Efficient Commercial Buildings Deduction (the Section 179D deduction). The purpose of Form 7205 is to provide a certification statement for a qualifying EECBP that was placed in service before January 1, 2023. 

What Is Section 13303? 

Section 13303 refers to a section within the Inflation Reduction Act that significantly amended and expanded the existing Energy Efficient Commercial Buildings Deduction under Section 179D of the Internal Revenue Code. This is what has enabled more building owners to receive the deduction. 

Can Government Entities Claim the 179D Tax Deduction? 

No, government entities themselves cannot directly claim the 179D tax deduction because they are tax exempt and do not pay federal income taxes. However, the 179D provision includes a mechanism for government entities (federal, state, and local), as well as Indian tribal governments and Alaska Native Corporations, to allocate the deduction to the designers of the energy-efficient commercial building property installed in their buildings.  

In effect, they can pass on the benefit to the architects, engineers, contractors, environmental consultants, or energy service providers responsible for the design of the qualifying energy efficient systems. 

Can Buildings Qualify if They’re Still Under Construction? 

Generally, a building cannot qualify for the 179D tax deduction until the building owner places it in service. This usually means the point at which the building or a portion of it is ready and available for its intended use. 

Even though an energy efficient design and the installation of qualifying property may occur during the construction phase, the building owner can’t claim the tax deduction until the tax year when the building (or the specific energy efficient property in a retrofit) begins operations. 

EnerConnex 

Contact EnerConnex today to learn more about how our powerful energy services can promote energy efficiency and cost-effective solutions.