Updated Federal Tax Deduction Rule For Building Upgrades

The passage of the Inflation Reduction Act (IRA) in 2022 saw the Federal Government commit billions of dollars in new spending and tax incentives to building energy efficiency and electrification programs. What has been overlooked by some is that the IRA expanded Sec. 179D of the IRS code, the tax deduction for energy efficient commercial buildings. A “commercial” building is defined as a non-residential building and residential buildings greater than 3 stories.

The IRA changed the 179D program so that existing buildings which reduce energy use intensity (EUI) by 25% to 50% from a pre-retrofit baseline are now eligible for the tax deduction. 179D had been tailored more to new buildings which can use energy models to demonstrate energy savings. Thus, existing building owners making upgrades not only save on energy costs but can now use 179D to reduce their tax liability on the property. While the new construction pathway remains, this expands eligibility.

In addition, there is more money available for tax deductions. Before the IRA, the 179D deduction was $1.80 / sq. ft.; now it ranges from $2.50 to $5.00 / sq. ft.

The IRS is expected to issue guidance later in 2023 about how building owners can take advantage of the retrofit pathway, we know that existing buildings would be eligible for the 179D tax deduction by meeting the following requirements:

  1. Cannot have previously claimed 179D deduction as a new building.
  2. Establish a baseline site Energy Use Intensity (EUI). The simplest way is by benchmarking energy usage in ENERGY STAR Portfolio Manager, which calculates the building’s EUI.
  3. Develop a “Qualified Retrofit Plan”. A written plan must be developed by a “Qualified Professional” (licensed architect or professional engineer) that:
    • Certifies current site EUI;
    • Describes the recommended upgrades to interior lighting, heating, cooling, ventilation, hot water, or envelope systems;
    • Certifies that the recommended building upgrades were installed, and;
    • Demonstrates that the building’s improved site EUI was achieved due to the building improvements.
  4. Reduce Site EUI by at least 25%. Buildings are eligible for a $2.50 / sq. ft. deduction for cutting site EUI by 25% rising to $5.00 / sq. ft. if they reduce the EUI by 50% or more.

The updated 179D requires projects to meet wage and apprenticeship standards on the project—including for contractors and subcontractors. Projects that do not satisfy these labor standards are still eligible for tax deductions, but at a significantly lower rate.

CCES has the experts to help you understand 179D and perform the steps above to take advantage of the revised rule and provide a significant tax benefit for upgrades to your building, besides saving significant energy costs. Contact us today at 914-584-6720 or at karell@CCESworld.com.