Big Changes Are Coming to the 179D Energy Tax Deduction in January 2023
On Tuesday, August 16, 2022, President Biden signed the Inflation Reduction Act (IRA) into law – one of the most sweeping climate bills ever created. The IRA is a massive piece of legislation, and it contains exciting changes to the 179D energy tax deduction.
In short, starting January 1, 2023, your commercial building will be eligible to claim a reduction to the calculated income tax owed of up to $5.00 per square foot for energy-efficient improvements. However, claiming that amount will require you to pay attention to the details.
What Is the 179D Energy Tax Credit?
We have written about the 179D deduction before in this blog, so we will keep this explanation short and simple:
IRS Tax Code 179D, under the Energy Policy Act of 2005 (EPAct), allowed for an immediate $1.80 per square foot tax deduction for commercial buildings that achieved a 50% reduction in energy costs related to the building envelope, HVAC systems, lighting, and lighting controls – starting in 2006. Extended many times, the 179D credit became permanent in January 2021.
The 179D deduction was created to encourage energy efficiency. The Inflation Reduction Act climate-focused bill aims to increase this encouragement by offering new enticements.
What Are the New IRA Updates to the 179D Deduction?
The Inflation Reduction Act extends and expands the 179D energy tax deduction, starting on January 1, 2023. As of that date:
- Energy cost reductions of 25% will be eligible for the deduction.
- The deduction will be reduced to 50¢ per square foot + 2¢ for every percentage point above 25. Therefore a 42% reduction of energy costs would result in an 84¢ per square foot deduction. (50¢ + 2¢ for each of the 17 percentage points above 25%.) These deductions are not to exceed $1.00 per square foot.
- Taxpayers can claim a bonus deduction of $2.50 per square foot, plus 10¢ per square foot on each percentage point above 25% IF a wage requirement is met. The wage requirement states that any laborers, workers, contractors, and subcontractors who worked on the project must have been paid at least the base wages determined by their local labor authorities. In this scenario, deductions cannot exceed $5.00 per square foot.
- Partial benefit allowances will be removed but new retrofit plan qualifications will be introduced.
- Eligibility will be extended to nonprofits, tribal properties, REITs, and other previously ineligible properties.
Previous requirements still apply, including that the energy reduction improvements must meet the stringent ASHRAE 90.1 standards (not LEED).
How to Claim the 179D Deduction
Claim procedures are the same for the new updates. Eligible building owners, commercial tenants, designers, and builders must work with either a Registered Professional Engineer (PE) or contractor licensed in the same jurisdiction of the building to complete the following steps:
- Have the qualified individual perform a field inspection.
- Ensure that the qualified individual uses software approved by the IRS or Department of Energy to calculate energy savings.
- Have the qualified individual certify the results.
- Only claim buildings or energy renovations that have been capitalized since January 1, 2006.
Schedule Your 179D Credit Consultation Soon
The end of the year is swiftly approaching, which means you must make an important decision now. Do you intend to claim $1.80 per square foot for already completed work, or should you meet the wage requirement and claim up to $5.00 per square foot after January 1, 2023?
Remember, buildings or renovations capitalized after January 1, 2006 are eligible for this deduction and, until December 31, 2022, you can still claim the $1.80 per square foot for work done 16 years ago. As of January 1, 2023, you will only be able to claim up to $1.00 per square foot for this work.
Paragon International’s engineering consultants meet all the requirements for claiming your 179D energy tax deduction, and our fixed asset tax experts will advise you on how you can maximize your tax deductions and savings at this critical juncture. Take advantage of this service now, so you can make the smartest decision about your business’s future.
Serving clients since 1985, Paragon International, Inc. provides independent, impartial and accurate cost segregation analyses, and property valuations and appraisals to assist in and support decisions related to taxes, risk management, investment, financing and corporate planning. Our consultants have extensive fixed asset experience – they’re fixed asset experts. Because of that we are able to offer a unique combination of irreplaceable human resources and advanced technology. We have specialists experienced in valuing closely-held securities, patents and other intangible assets, business enterprises, buildings, equipment and real estate. In addition, Paragon provides complete inventory and asset management services and solutions, including software customization and training, barcode labels and scanners, and tailored inventory services such as data conversion and integration, asset inventories, asset policies, cost reconciliation, and appraisal services. Contact Paragon International to discover how we can help you.
IRS Circular 230 Disclosure: Paragon International, Inc. and its divisions do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. tax-related penalties.