Section 179D of the Internal Revenue Code, first enacted in 2006, grants qualifying building owners or tenants of commercial buildings a federal tax deduction for the installation of energy-efficient features and systems in existing or new-build projects. The Inflation Reduction Act of 2022 (“IRA”) expanded the reach of Section 179D by permitting non-profit entities to pass through all or part of the deduction to “designers,” effectively granting a benefit otherwise unusable due to their tax-exempt status.
Prior to the IRA, only government owners (including public schools and universities) of qualifying buildings could utilize this pass through to the person(s) or entity(ies) primarily responsible for designing the project. However, the IRA significantly expanded the list of eligible building owners and tenants to include all tax-exempt entities and organizations, including private schools and universities, religious institutions, charitable organizations, private hospitals, tribal governments, museums, foundations, and political organizations and entities.
What is the amount of the tax deduction? Up to $1.88 per square foot for properties placed in service before January 1, 2023, and up to $5.00 per square foot (by including bonus deductions for meeting prevailing wage and apprenticeship requirements and for reducing the total annual energy and power costs for the property by up to 50%) for projects placed in service after such time (but in no event more than the cost of the qualifying property reduced by the aggregate deductions claimed over the prior three years). The Department of Energy provides a public list of software programs that may be used in calculating energy and power consumption for purposes of 179D. The deduction is indexed to inflation, so projects completed in 2023 and 2024 can earn, respectively, up to $5.26 and $5.65 per square foot.
How can a qualifying owner and designer claim the deduction? The non-profit building owner/tenant must allocate the 179D deduction to the designer in writing, and the written allocation must meet the requirements set forth in guidance published by the IRS. The deduction is then claimed on IRS Form 7205 from the IRS and submitted as part of the non-profit’s and designer’s tax returns.
What constitutes a “designer”? According to guidance published by the IRS, what constitutes a “designer” is relatively broad. It may include, for example, an architect, engineer, contractor performing to design work, environmental consultant or energy services provider who creates the technical specifications for a new building or an addition/renovation of an existing building. One that merely installs, repairs or maintains the property is not a designer for purposes of 179D. The qualifying project owner may choose to allocate the full deduction to one designer or, at its discretion, among several designers.
What types of projects qualify? Projects related to one or more of: energy-efficient interior lighting, building envelope, HVAC and hot water (as part of new construction, renovations, or additions).
The benefits to the tax deductions available under Section 179D are extensive and can be utilized by a breadth of parties participating in building energy-efficient projects. It is helpful for tax-exempt owners and tenants to understand how they may pass through certain savings when assessing potential designers. Similarly, designers who can illustrate how their projects meet the technical requirements under 179D may establish a material advantage over those who cannot.
