Owners of commercial properties that incorporate energy-efficient building components can now capitalize on advantageous tax deductions. The potential benefits extend to increased energy savings and compliance with prevailing wage and apprenticeship prerequisites.
Expanded Deduction Potential Under IRC Section 179D:
The Internal Revenue Code (IRC) Section 179D opens doors to this deduction, and it has been broadened under the provisions of the Inflation Reduction Act of 2022.
Eligibility Criteria:
Starting from January 1, 2023, this deduction is applicable to two groups:
- Owners of Eligible Commercial Buildings
- Designers of Energy Efficient Components
The latter applies specifically to installations in buildings owned by designated tax-exempt entities, encompassing government bodies, Indian tribal governments, Alaska Native Corporations, and other exempt organizations. This extension was previously exclusive to building owners and designers of energy-efficient components in certain government-owned structures.
Qualifying Buildings:
To qualify for this deduction:
For Energy Efficient Commercial Building Property (EECBP):
- The property must be integrated into a U.S.-located building.
- It must align with the specifications of Reference Standard 90.1 by ASHRAE and the Illuminating Engineering Society of North America.
- Eligible components encompass interior lighting systems, heating, cooling, ventilation, hot water systems, and the building envelope.
- The property must be part of an overall plan to reduce energy costs by 25% or more compared to a reference building meeting the baseline requirements of Reference Standard 90.1.
For Energy Efficient Commercial Building Retrofit Property (EEBRP):
- The building must be situated in the U.S. and have been operational for a minimum of 5 years before establishing a retrofit plan.
- Eligible systems are interior lighting, heating, cooling, ventilation, hot water systems, and the building envelope.
- Certified energy savings requirements must be met.
Deduction Amounts in 2023 and Beyond
For assets placed in service in or after 2023, the deduction is the lesser of the installed property cost or the savings per square foot, calculated as:
- $0.50 per sq. ft. for 25% energy savings
- Plus $0.02 per sq. ft. for every percentage point above 25%
- Up to a maximum of $1.00 per sq. ft. for 50% energy savings
Previous 3-year deductions (4 years for allocated deductions) are deducted from the maximum before determining the current-year deduction.
Prevailing Wage and Apprenticeship Boost
Commencing in 2023, meeting local prevailing wage and apprenticeship criteria results in an increased maximum deduction, reaching 5 times the savings per sq. ft.
Prior to 2023, for property in service before January 1, 2023, the deduction is capped at $1.80 per sq. ft. (adjusted for post-2020 inflation) for buildings with 50% energy savings. Partial deductions are available for specific property types.
Find detailed property requirements below:
(Refer to Notice 2022-61 for comprehensive details.)
Notice 2012-26
Notice 2006-52
Notice 2008-40
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