How to Claim the 179D Deduction for Commercial Buildings

Did you know you could be saving hundreds of thousands of dollars on commercial green building projects through a federal tax deduction? The tax-saving opportunity is called the Energy-Efficient Commercial Buildings Deduction but is widely referred to as the 179D deduction.  You could slash a ton of money on your tax liability for energy-efficient improvements to your commercial or industrial facility.

What is the 179D tax deduction?

The 179D tax deduction was first passed by Congress as part of the Energy Policy Act of 2005 in response to energy consumption and energy usage concerns. It was a temporary provision but was extended repeatedly over the years. It was finally made permanent in 2021 under the Consolidated Appropriations Act of 2021.
The 179D deduction allows owners of new and existing commercial buildings the opportunity to save on their tax liability for energy-efficiency projects.

Who can claim the 179D deduction?

The 179D deduction is usually claimed by commercial building owners, but can also be claimed by architects, construction contractors, design-build firms, general contractors, energy or sustainability consultants, and engineers among other entities.
The types of commercial buildings eligible include:

  • Industrial buildings
  • Office buildings
  • Apartment buildings that are at least four stories
  • Warehouses

What improvements are eligible for the 179D deduction?

Improvements eligible for the section 179D deduction are:

  • Building Envelope
  • Interior Lighting
  • Heating, Cooling, Ventilation or Hot Water Systems

Please note, the eligible energy efficiency upgrades must reduce energy and power cost by 50% or more in comparison to a building meeting the minimum requirements of the American Society of Heating, Refrigerating and Air-Conditioning Engineers ASHRAE Standard 90.1

Cost savings are required to be qualified using special software, which you can find here. As of the release of this article, the link provides calculations for projects placed in service on or before December 31, 2020. Updates will be made for projects placed in service on or after January 1, 2021 at a later date.

How much can be claimed under Section 179D?

An entity can claim a tax credit of up to $1.80 per square foot. A partial deduction of $0.60 per square foot can be claimed by building owners who update only one of the above-mentioned systems. An upgrade to your interior lighting systems can qualify for more under the Interim Lighting Rule. Learn more about the money-saving benefits of an LED lighting retrofit here.

The table below explains the available tax savings in more detail:

How do you claim the 179D deduction?

You will have to connect with a qualified third-party contractor or professional engineer (PE) that uses approved computer software to model the energy performance of your energy-efficiency upgrades. The software then compares your energy performance model to a building that meets the minimum requirements of ASHRAE 90.1.

The third party will also conduct a physical inspection of your facility. The third party will review and analyze the results of the digital energy model as well as verify the findings during their physical walk of your site.

They will sign documentation certifying your building meets the requirements to qualify for the Section 179D tax deduction.

The qualified third party must be licensed in the state where your building is located.

The 179D deduction also allows a government or nonprofit owner to allocate their deduction to the architect or contractor involved with the energy-efficiency improvements of the building. In order to receive this allocation of the deduction, the entity claiming the 197D deduction must provide two documents. These documents include: 

  1. An allocation letter from the government entity or nonprofit organization that owns the property confirming the allocation. This letter must be signed by an authorized representative of the agency or organization.
  2. A report that certifies the energy-efficiency building qualifies for the 179D tax deduction, as noted above.

Can I retroactively claim the 179D deduction?

Yes, you can retroactively claim the tax deduction for as far back as 2006 if you’re a building owner. In order to do so, you’ll have to file an accounting method change. Other entities retroactively claiming will have to file an amended tax return.

That said, you should claim the 179D deduction in the same tax year as to when the project is placed in service.

While you should certainly contact your tax professional for further advice or assistance, we can help you get the energy-efficiency upgrades you need to qualify for the 179D tax incentive. Our energy-efficiency specialists are ready to help! Connect with us: (800) 834-8737 so you can take advantage of new energy-saving technology and save on installation costs as well!