A Deeper Dive into Section 179D Energy Policy Act

[Julio Gonzalez]

The 179D Energy Policy Act gives taxpayers a deduction for installing energy efficient assets such as the building envelope, HVAC and lighting. It is for apartment buildings greater than 4 stories and newly constructed or energy-efficient renovated commercial buildings. There were recent updates to Section 179D as a part of the Inflation Reduction Act. The deduction was extended in its current form through December 31, 2022. The deductions are increased beginning January 1, 2023.

Here are some of the questions that I get asked most often:

How much is the deduction?

• The maximum amount that can be claimed is $1.80 per square foot if there’s a 50% reduction in total annual power and energy costs.
• There’s a partial deduction of $0.60 per square foot for reduction of energy consumption by HVAC, lighting and the building envelope.
• There’s a partial deduction of $0.30 - $0.60 per square foot for reduction of lighting power density of 25-40%.

If I claim the Section 179D deduction, will this trigger an audit?

No, claiming this deduction does not automatically trigger an audit. However, you must ensure you are following the correct steps in determining the deduction amount that you qualify for. Here are the guidelines utilized by the IRS practice unit when they are conducting an audit of Section 179D studies.

How does a company/taxpayer go about claiming this deduction?

You can have a Section 179D study performed on your property in the same tax year that you place your building into service. You are only able to claim the deduction if your building meets the requirements of the study. You are also able to retroactively claim this deduction if you file an amended tax return.

As a taxpayer, how do I report this deduction?

For bookkeeping purposes, you should have a separate line item on your P&L to account for the Section 179D deduction under “other expenses”. Additionally, on the balance sheet, you will reduce your cost basis in the property by this deduction amount.

Are partial deductions allowed?

Yes, if the entire building doesn’t meet the 50% energy savings requirement, you can take a partial deduction for each separate building system. The energy savings must be certified by a qualified professional stating that the system meets or exceeds the applicable savings targets. The maximum savings is $0.60 per square foot for each subsystem. The subsystems and their applicable energy savings targets include:

• HVAC and hot water systems (15%)
• The building envelope (10%)
• Interior lighting (25%)

Can my CPA do this? If so, why have they not mentioned this deduction?

If your CPA has not mentioned the deduction, they may not be aware of it. If you think your building may qualify, I encourage you to discuss it with your CPA. Your CPA can do this but they must ensure they follow the IRS guidelines and either employ or act as an independent third-party certifier.

Can I apply for this deduction regardless of how much I spent on upgrades on the building?

The amount of the tax deduction is the lower of 1) the allowable tax deduction or 2) the value of the asset. Therefore, your tax deduction cannot be greater than the amount you spent on equipment and installation.

If I own the building with another taxpayer, can we both claim the deduction?

Yes, both taxpayers are able to claim the deduction, however the total amount of Section 179D deductions cannot exceed the allowable amount for that specific tax deduction.

What other questions do you have regarding Section 179D?