How to Claim a Section 179D Deduction 2023

how to claim a section 179d deduction by tax hack accounting

Section 179D of the Internal Revenue Code is a tax incentive program designed to encourage energy efficiency in commercial buildings. The Energy Policy Act of 2005 originally created the program, but the government extended the program several times since it’s original enactment.

The program provides tax deductions of up to $5.00 per square foot for energy-efficient improvements to commercial buildings. Congress designed the program to reduce energy consumption, promote sustainable building practices, and help businesses save money on energy costs.

What is Section 179D?

The §179D Energy Tax Incentive is a deduction available for energy-efficient commercial buildings. The deduction was originally only available for projects related to government-owned buildings.

With the passing of the Inflation Reduction Act in 2022, architects, engineers, and design-build contractors can now receive allocations for their design work on a wider range of building types, including tax-exempt entities, beginning in 2023. This change in eligibility will allow more people to tap into the deduction, potentially leading to more widespread adoption of energy-efficient building practices.

Despite the expanded eligibility criteria, accessing the 179D deduction still requires meeting specific energy-saving targets for lighting, HVAC, and building structure, which must be certified by a qualified engineer or contractor.

Section 179D Deduction Rules

There are several strict rules for claiming Section 179D. We’ll look at the expenses that qualify for the deduction and who can claim it.

Qualified Expenses

Taxpayers who invest in constructing new buildings or improving their existing buildings are eligible for a 179D deduction. These investments must be aimed at reducing energy use. Eligible improvements include interior lighting, HVAC systems, heating, cooling, ventilation, and hot water systems, among others.

To qualify for the 179D deduction, the energy-efficient improvements made to the building must meet certain criteria established by the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE). The improvements must result in a reduction of total annual energy/power costs by at least 50%. By meeting these standards and earning the deduction, businesses can not only save money on energy costs, but also demonstrate their commitment to sustainable building practices.

To claim the 179D Energy Tax Incentive, the building owner or primary designer of the energy-efficient improvements must obtain a certification of energy savings from a qualified third-party. The certification process involves an inspection and a review of the claimed energy-efficient improvements. You must also calculate the energy savings achieved as a result of those improvements.

A properly licensed engineer or contractor must complete the certification, which must meet strict IRS requirements. IRS rules mandate the use of approved software and the submission of specific documentation.

Once you complete the certification, the building owner or primary designer can claim the deduction on their tax return. You must obtain a certification before the tax return deadline for the year when the improvements were placed into service. To claim the credit, the taxpayer needs to fill out Form 3115 when filing their return.

Who Can Claim it?

Under the 179D Energy Tax Incentive, the owner of the qualifying commercial building the deduction can claim the improvements. Tenants who install energy-efficient improvements can also claim the discount. In the case of a government-owned building, the deduction can be allocated to the designer or contractor responsible for the energy-efficient improvements, with written consent from the government entity.

In addition, the Inflation Reduction Act of 2022 expanded the eligibility criteria for the 179D deduction. Starting in 2023, architects, engineers, and design-build contractors can receive allocations for their design work on a wider range of building types, including tax-exempt entities. This means that more individuals and entities will be able to claim the deduction, potentially leading to more widespread adoption of energy-efficient building practices.

How Much Can I Save With Section 179D?

How Much Can I Save?

The Inflation Reduction Act of 2022 not only expanded the eligibility criteria for the §179D Energy Tax Incentive, but it also increased the deduction amount available to qualifying commercial building owners or tenants.

Starting in 2023, the deduction will increase from $1.80 per square foot to $5.00 per square foot, a substantial increase that is likely to encourage even more investment in energy-efficient improvements. The increased deduction will help businesses save money on energy costs while also promoting sustainable building practices that benefit the environment.

It is important to note that the total square footage of the building is a limiting factor when claiming the §179D deduction.

What Improvement Projects Qualify for Section 179D?

There are a variety of improvement projects that may qualify for the 179D Energy Tax Incentive.

Heating & Cooling

This could include the installation of more efficient HVAC systems or the addition of insulation to improve the building’s overall energy efficiency. To qualify for the deduction, these improvements must result in at least a 50% reduction in total annual energy/power costs.

LED Lighting

LED lighting, for example, is much more efficient than traditional incandescent and fluorescent bulbs, and upgrading to LED lighting can result in significant energy savings. The installation of other energy-efficient lighting solutions may also qualify for the deduction.

Water Systems

improving a building’s water systems can also lead to significant energy savings and may qualify for the 179D deduction. Energy-efficient alternatives for water systems can include solar-powered pumps, efficient water heaters, and other upgrades to reduce water consumption and waste.

Final Thoughts

The §179D Energy Tax Incentive provides a valuable opportunity for commercial building owners and tenants to invest in energy-efficient improvements that can ultimately lead to significant cost savings and reduced environmental impact.

With the recent changes brought about by the Inflation Reduction Act of 2022, the deduction amount available has increased to $5.00 per square foot, and more individuals and entities are now eligible to claim the deduction, making it an even more attractive option for those looking to improve the energy efficiency of their buildings.

If you’re on the hunt for creative ways to save on taxes, Tax Hack Accounting can help. Our talented tax pros can help you take advantage of Section 179D and other valuable tax credits. Connect with us now to book a one-on-one strategy session with one of our Tax Hack pros.


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