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How To Maximize Energy Efficiency Deductions 179D And 45L In Your Building Projects

, , | October 24, 2023 | By


The 179D tax deduction, also known as the Energy Efficient Commercial Buildings Deduction, was introduced as part of the Energy Policy Act of 2005 with the aim of encouraging businesses to invest in energy-efficient improvements for their buildings and reduce overall energy consumption.

Initially, the deduction was only available for buildings placed in service between 2006 and 2013, but its success in promoting energy efficiency led to multiple extensions. 

Recently, the Inflation Reduction Act of 2022 has expanded the benefits of the 179D deduction.

For properties placed in service prior to January 1, 2023 (pre-Inflation Reduction Act), eligible building owners or designers can claim a tax deduction of up to $1.80 per square foot for qualifying energy efficiency improvements. The amount of the deduction depends on the level of energy efficiency achieved, with higher levels resulting in greater deductions.

Properties placed in service after January 1, 2023 (post Inflation Reduction Act) may be eligible for up to $5.00 per square foot. Again, the amount of the deduction depends on the level of energy efficiency achieved, with higher levels resulting in greater deductions.

A wide range of businesses, including commercial real estate developers, architects, engineers, and contractors, have utilized the 179D tax deduction over the years. It has effectively incentivized the implementation of energy-efficient technologies and practices in buildings across various industries. The Inflation Reduction Act has also expanded the ability 
of developers, architects, engineers, and contractors to benefit from this deduction as all Tax-Exempt entities are able to transfer the deduction to the person in charge of the energy-efficient design improvements of the building. 

In addition to providing financial benefits, the 179D tax deduction has had a positive impact on the environment. By encouraging the adoption of energy-efficient measures, it has contributed to a significant reduction in greenhouse gas emissions and a more sustainable future.

Overall, the 179D tax deduction has played a crucial role in promoting energy efficiency in commercial buildings. Its history showcases the ongoing commitment to incentivizing sustainable practices and emphasizes the importance of continued investment in energy-efficient technologies.


How to Determine if Your Building Qualifies for the 179D Tax Deduction


To determine if your building qualifies for the 179D tax deduction, there are specific requirements that you need to meet. One of the key requirements is that your building must have made energy efficiency improvements. These improvements can include upgrades to your lighting systems, HVAC systems, and the building envelope.

  • When it comes to your lighting systems, the focus should be on energy-efficient options. This can include LED lighting, which not only reduces your energy consumption but also has a longer lifespan compared to traditional lighting options. Other eligible lighting systems may include occupancy sensors or daylighting controls, which can help optimize your energy usage based on occupancy and natural light availability.
  • For your HVAC systems and building envelope efficiency, the emphasis is on the overall energy performance of your building. Upgrades to your HVAC systems can include installing high-efficiency equipment, such as variable refrigerant flow systems or heat pumps. Improving your building envelope involves enhancing insulation, sealing air leaks, and upgrading your windows and doors to minimize heat transfer.

In order to prove qualification for the 179D tax deduction, your energy efficiency improvements are subject to a certification process. The certification process involves conducting an energy model analysis to demonstrate the energy savings achieved through your upgrades. This analysis is typically performed by a qualified individual or firm, who will provide you with a certification report.

By meeting the guidelines and successfully completing the certification process, your building can potentially qualify for the 179D tax deduction. The amount of potential savings can vary depending on the level of energy efficiency you achieve. However, it's important to note that the deduction can now be as high as $5.00 per square foot, which can amount to significant savings for your business.


Common Misconceptions About The 179D Tax Deduction


There are a few common misconceptions about the 179D tax deduction that many business owners and individuals may have. These misconceptions can prevent them from taking advantage of potential savings. By dispelling these myths, we can help provide a better understanding of the true benefits of this valuable tax deduction.

Only new buildings can qualify

One common misconception is that only new buildings can qualify for the 179D tax deduction. However, this is not true. The deduction is available for both new construction and existing buildings, as long as they have made energy efficiency improvements. Whether you have recently built a new facility or have an older building that has undergone renovations, you may still be eligible for this valuable tax deduction.

The deduction is not worth the effort

Another misconception is that the 179D tax deduction is not worth the effort. Some business owners may think that the paperwork and certification process are too cumbersome, making the deduction not worthwhile. However, this couldn't be further from the truth. The potential financial savings and long-term benefits that the 179D tax deduction can provide make it a valuable incentive for businesses of all sizes.

The 179D tax deduction can result in significant savings for businesses, with the potential for up to $5.00 per square foot. These savings can add up quickly, especially for larger buildings or facilities with extensive energy efficiency improvements. Additionally, by investing in energy-efficient upgrades, businesses can benefit from reduced energy costs over time, contributing to long-term savings and a more sustainable future.

It's important for business owners to understand that the effort involved in applying for the 179D tax deduction is well worth the potential financial benefits. By dispelling these misconceptions, we hope to encourage more businesses to take advantage of this valuable tax incentive and make the necessary investments in energy efficiency.


Other Incentives and Programs in Conjunction with the 179D Tax Deduction


In addition to the 179D tax deduction, there is another valuable incentive known as the 45L tax credit for energy-efficient homes. This credit is specifically targeted towards the construction of energy-efficient residential properties, and it can be used in conjunction with the 179D tax deduction to maximize savings.

The 45L tax credit for energy-efficient homes

Combining the 179D tax deduction with the 45L tax credit can significantly boost potential savings for businesses and developers. If a commercial building includes residential units and meets the criteria for both incentives, it has the potential to qualify for both the 179D tax deduction and the 45L tax credit. This can result in substantial financial benefits for the project.

It's important to note that the eligibility criteria and certification process for the 45L tax credit are separate from those of the 179D tax deduction. Builders and developers must obtain certification from an independent third-party to claim the 45L tax credit, verifying the energy efficiency of the residential properties. 

State and local incentives for energy-efficient buildings

Alongside federal incentives like the 179D tax deduction and the 45L tax credit, there are also a variety of state and local programs that offer incentives for energy-efficient buildings. These incentives can further enhance the financial advantages of investing in energy efficiency and help businesses save even more money.

State and local incentives can come in different forms, such as tax credits, grants, rebates, or low-interest loans. The availability and specifics of these incentives vary depending on the location, so it's crucial for businesses to thoroughly research and understand the programs available in their area.

For instance, some states offer tax credits or exemptions for energy-efficient equipment or renewable energy systems installed in commercial buildings. Others may provide financial incentives for energy audits or energy-efficient building certifications. Additionally, certain local utilities offer rebates or incentives for businesses that undertake energy efficiency upgrades.

By combining state and local incentives with the 179D tax deduction, businesses can maximize their potential savings. These additional incentives can help offset the initial costs of energy efficiency improvements and provide a faster return on investment.

If you have questions about how to take advantage of these incentives for a completed project or a project you're planning, talk to our team here at C&A.