Section 179D Energy Tax Credit Study
Reduce Your Building Energy Costs and Save Taxes
The Energy Policy Act of 2005 (“EPACT”) added IRS Tax Code Section 179D, creating an incentive in the form of up to $1.80/sf in depreciation deductions for commercial buildings. That’s an immediate deduction against the taxpayer’s Federal Income Tax liability for an investment in energy efficient commercial buildings.
The deduction is eligible for buildings that achieve a 50% reduction in energy costs related to the building envelope, heating, ventilating, air conditioning (HVAC), lighting and lighting controls.
Originally effective from 1/1/2006 through 12/31/2007, the deduction was extended through 12/31/2016 by The PATH Tax Act of 2015. It was extended again on 12/20/2019 under the year-end government spending package. The latest 179D Energy extension is retrospective from 2017, and prospective through 2020. This means that commercial buildings placed into service in years 2006 through 2020 may qualify for the credit.
Requirements for Claiming the 179D Tax Deduction
- A taxpayer must have a qualified individual (either an engineer or a contractor licensed in the same jurisdiction as the building) perform a field inspection of the building.
- A taxpayer or qualified individual must use approved software from the Treasury Department’s list of certified software to calculate the energy savings.
- A qualified individual must certify the results.
- The building or energy renovation must be capitalized after January 1, 2006.
The Section 179D tax credit requirements are not satisfied by LEED certification. An extensive engineering analysis by an expert is essential to realize tax savings.
The potential deduction and tax savings for 100%, 66 2/3%, and 33 1/3% qualification is shown below:
|Gross Sq. Ft. Area||Section 179(D) Full Credit Rate||Full Credit Potential Deduction|
|39%||<== Tax Rate|
|100% Tax Savings ==>||$140,400.00|
|66 2/3% Tax Savings ==>||$93,604.68|
|33 1/3% Tax Savings ==>||$46,795.32|
Hotel – While not intentional, a 160 room hotel with restaurants and large meeting rooms qualified for the lighting portion of the credit for a first year tax savings of $46,800.
Distribution Center – Refrigeration, freezer, and dry storage areas at this center with sensor controlled lighting, insulated walls and ceilings, and highly reflective roof satisfied the lighting and building envelope requirements and saved $228,000 the first year!