What has changed in the 179D tax deduction?
Before the IRA, the 179D tax deduction allotted a $.50 tax deduction per square foot for buildings achieving a 25% reduction in energy use from the baseline or the “more recent” ASHRAE 90.1 guidelines. With the passage of the IRA, 179D language now increases that deduction to a whopping $2.50-$5.00 per square foot for buildings that achieve anywhere between a 25-50% reduction in their baseline. This represents a 250% increase in the starting deduction rate for new and existing buildings, as well as buildings held by commercial, non-profit, and government entities. In order to meet these higher deduction standards, projects must demonstrate that they meet prevailing labor wages for the project as part of the IRA’s effort to tool up our domestic workforce to meet increased demand for more efficient buildings and construction. Deduction rates are lowered if the project does not meet prevailing labor wages, down to $.50/square foot for 25% energy reductions, with an additional $.02/sqft for each additional reduction percentage achieved.
This increased deduction goes into effect in 2023 – meaning buildings that begin occupancy next year will be eligible for this increased tax incentive. Commercial buildings that are older will also be eligible to take part in this tax deduction through energy reductions demonstrated through retrofits and can claim deductions for any further energy reductions every three years. Existing government-owned buildings are eligible for the same retrofit deductions every four years. Tax-exempt properties can also partake in this initiative; deduction dollars will go towards the design team instead of building owners/operators, though language around this portion of the tax code is still unclear.
What does this mean for building owners & building policy?
The improved 179D Energy Efficiency tax deduction represents a huge market shift towards high-performance, energy-efficient commercial buildings. A qualifying new building standing at 100,000 sq ft stands to deduct up to $250,000-$500,000 from their taxes if they prove and verify energy reductions. This promotes not only the use of energy-efficient building features but fair labor wages and the expansion of training for sustainable building operations and maintenance.
Unlike building and energy policies that require buildings over a certain square footage to comply, the 179D tax deduction has no minimum or maximum eligible building size. New commercial, government, and non-profit buildings of all sizes will be able to take advantage of this tax deduction. Energy efficient buildings have a higher return on investment from the outset than a standard code building. When combined with the 179D tax deduction, owners could recoup invested money much more quickly when investing in high-performance building systems and standards and are likely to have higher occupancy rates and rental prices.
Philadelphia’s Building Energy Performance Program (BEPP), requires large commercial buildings to report their maintenance plan and action steps towards maintenance and retrofits every 5 years. Under the new 179D language, existing buildings would be eligible for the tax deduction through energy reductions achieved by retrofits every 3 years. There is an opportunity for building owners to sync their BEPP compliance (or other city-mandated programs outside of Philadelphia) with the tax deduction in order to receive a higher return on investment for city-mandated building tune-up programs. Both Benchmarking and BEPP are critical aspects of the required 179D verification and, the financial incentive is much higher now, making compliance with these programs more appealing both for new and existing construction.
Apart from making energy-efficient buildings more appealing and mainstream, this incentive is a window of opportunity for towns, cities, and states to implement building policies that incentivize high-performance buildings without requiring extra funding from local or state governments. This unprecedented amount of funding for climate-conscious initiatives makes developing energy-efficient commercial buildings an extremely smart financial choice and both cities and building owners should look closely at the opportunities it presents to improve the health and wellbeing of the people, communities, and bottom line of all involved.
More Info on the Updated 179D Tax Deduction and Green Building Incentives
Read more about the updated 179D incentives here and here. For more info on taking advantage of financial incentives for existing building retrofits, check out information from the ENERGY STAR that will help locate available incentives for energy-efficient upgrades near you. To learn more about how IRA funding and incentives could make an impact on your business, home, town, or city – read more from USGBC’s breakdown of IRA funding for buildings.
