Energy-Efficient Tax Credits & Deductions 

Energy Study for EPAct 179D 

A result of the Energy Policy Act of 2005, the 179D Tax Deduction incentivizes taxpayers to increase the energy efficiency of their new construction or renovation projects. The program focuses on three key areas of construction—interior lighting systems, building envelope, and HVAC – and is in effect for work completed after December 31, 2005. The 179D Tax Deduction was made permanent by the Consolidated Appropriations Act of 2021, but program standards and parameters were changed by the Inflation Reduction Act of 2022.  

179D Tax Deduction for Projects Placed-in-Service Between 1/1/2006-12/31/2022: 

The incentive is based on the analysis of the installed systems as compared to benchmarks designated in the ASHRAE standards. The goal is to achieve a minimum 50% energy savings versus these benchmarks.  

  • For buildings placed-in-service between 1/1/2016-12/31/2020, the designated reference standard is the ASHRAE 90.1 2007 standard.  
  • For buildings placed-in-service after 1/1/2021, the reference standard is the most recent ASHRAE standard published 2 years before the start of construction of said building. 

Depending on the actual level of savings attained, a project can achieve a federal tax benefit of a $0.60 to $1.80 deduction per square foot. For projects placed-in-service after 12/31/20, these amounts are adjusted for inflation annually. 

179D Tax Deduction for Projects Placed-in-Service After 12/31/2022:  

The ASHRAE standards are still in play, but the goal has changed — taxpayers must now demonstrate a 25% reduction in total annual energy and power costs relative to benchmark. For buildings placed-in-service after 12/31/2022, the reference standard to be used is the most recent ASHRAE standard published in the 4 years before the property was placed-in-service.  

The scope of savings still varies with project size, and a project can achieve a maximum federal tax benefit of $5.00 per square foot. The deduction is now determined using an “Applicable Dollar Value” (ADV) multiplication factor. The initial value and eventual cap of the ADV variesdepending on whether prevailing wage and apprenticeship requirements are satisfied. 

As mentioned above, 25% is the new minimum energy reduction threshold that must be met to qualify for the deduction. The ADV will reward taxpayers who exceed this minimum threshold up to a certain cap. 

Under the legacy program or the New Law, the analysis must be done in compliance with the methodologies outlined in the program, and depending on the scope of work to be evaluated, may include a full building simulation model. As with most tax programs, the benefit is related to the unique facts and circumstances of each individual project. The personal attention each client receives in the “Consult” phase of The Capstan Course will ensure that our team fully understands your unique situation.

Energy Study for 45L Energy-Efficient Tax Credit  

The 45L Tax Credit is a one-time federal tax credit for energy-efficiency that promotes the construction of “green” residential dwellings. The energy-efficient Credit is available to builders, developers and others who build homes for sale or lease, and credit is allocated per “dwelling unit.” The IRA retroactively extended the 45L Tax Credit for properties placed-in-service through 2022.  

For Projects Placed-in-Service Between 1/1/2006-12/31/2022: 

The credit per dwelling unit and the existing qualification criteria will remain unchanged. 45L-eligibility is restricted to for-sale residential homes and residential rental property with a maximum of 3 stories, providing a $2000/unit tax credit for qualifying unit/s. Each unit must be assessed individually to verify the required reduction in energy consumption.  

The IRA also extends the 45L Energy-Efficient Tax Credit moving forward for projects placed-in-service from 1/1/2023-12/31/2032.  For projects placed-in-service in 2023 and beyond, several major changes will go into effect:  

  • The energy efficiency requirements for the 45L Energy-Efficient Credit will change from 50% better than the 2006 IECC energy code to Energy Star and Zero Energy Ready (ZER) home standards.   
  • The maximum Energy-Efficient Tax Credit will increase to up to $5,000/dwelling unit 
    • The maximum tax credit for single-family Energy Star homes will be $2,500  
    • The maximum tax credit for single-family ZER homes will be $5,000.  
    • For the Energy Star Multifamily program (5 units or more) the Energy-Efficient Credit will be $2,500 per unit, subject to prevailing wage provisions*. If these provisions are not followed, the credit is reduced to $500 per unit. 
    • For the Zero Energy Ready Multifamily Program (5 units or more) the Energy-Efficient Credit will be $5,000 per unit, subject to prevailing wage provisions*. If these provisions are not followed, the credit is reduced to $1,000 per unit. 
  • Section 42 Low Income Housing Tax Credit (LIHTC) projects will NOT need to take the 45L Tax Credit for Energy-Efficiency into account when determining adjusted basis of a property for LIHTC Credits. 

Clients are encouraged to consult Capstan regarding eligibility of past projects and planning considerations for future projects. 

Services for CPAs

In the face of growing tax code complexity, it’s almost impossible to cover every area with in-house resources. For expertise in understanding and applying the myriad of complexities with the Tangible Property regulations and other IRS Code impacting commercial real estate, turn to Capstan Tax Strategies.

Services for Business Owners

Accelerating depreciation has long been a strategy employed by real estate owners to take advantage of immediate tax savings. The Tangible Property Regulations and the recent Tax Cuts and Jobs Act has created significant opportunities that elevate the many uses of Cost Segregation Studies. Learn how Capstan can help.

Frequently Asked Questions (FAQs)

What are these incentives? Are they energy-efficient credits or energy-efficient deductions?
The 179D incentive is an energy-efficient tax deduction, while the 45L incentive is an energy-efficient tax credit. Tax deductions lower your taxable income for the year. Tax credits directly reduce the amount of tax you owe, providing a dollar-for-dollar reduction.

179D Tax Deduction FAQs

What is the 179D Tax Deduction for Commercial Buildings?

The 179D Tax Deduction is a federal incentive that rewards contractors for completing ground-up energy-efficient construction projects and performing energy-efficient retrofits. The 179D Energy-Efficient Deduction may be taken on energy-efficient commercial buildings as well as residential rental buildings that are at least 4 stories tall.  

Property owners must demonstrate a reduction in energy consumption versus the benchmark standard.

The Energy-Efficient Tax Deduction may also be claimed by engineers, architects, or other design professionals.

What are the benefits of the 179D Tax Deduction?

Currently, the benefit of the Energy-Efficient 179D Deduction depends on the energy efficiency increase over the baseline and on whether a contractor meets prevailing wage and apprenticeship (PWA) requirements. The current maximum benefit is $5.00/SF adjusted for inflation.

Before the passing of the Inflation Reduction Act, benefit was calculated differently. There were three potential areas of benefit – HVAC, building envelope, and lighting. Each area could provide benefit of $0.63/SF, for a potential maximum deduction of $1.88/SF.

How can I claim the 179D Tax Deduction?

The property must be evaluated by an engineer or contractor. Additionally, modeling software will be employed to simulate building energy consumption and ensure that it meets established thresholds for efficiency.

The IRS released a new form for claiming the 179D Tax Deduction (Form 7205) in February 2023. However, the IRS is likely to roll out an even newer version of this form that may require demonstrated compliance with PWA requirements.

45L Tax Credit FAQs

What is the 45L Tax Credit for Energy-Efficiency?
The 45L Tax Credit promotes the construction of “green” residential dwellings. This one-time energy-efficient Credit may be claimed by builders or developers of residential properties. The incentive is allocated per “dwelling unit,” meaning that not all units in a property must pass, but the Credit can only be claimed for units that do.
What are the benefits of the 45L Energy-Efficient Tax Credit?

Under the Inflation Reduction Act, the maximum Energy-Efficient Tax Credit may reach up to $5,000/dwelling unit for homes that meet the Department of Energy’s Zero Energy Ready Home Standards, or up to $2,500/dwelling unit for homes meeting Energy Star Standards. Prevailing wage requirements must be met.

Before the IRA was passed, the Energy-Efficient Tax Credit was $2,000 per dwelling unit.

How do I claim the 45L Energy-Efficient Credit?

The 45L Energy-Efficient Credit procedure has changed significantly under the IRA. A taxpayer will need a supportive team to qualify, including an Energy Consultant, a HERS Rater, and a Builder that is an “Energy Star Partner.”

The project must be Energy-Star certified up front. This is critical for claiming the 45L Energy-Efficient Tax Credit, and cannot be done after the fact. The Capstan team can guide you through the new process, and help assemble the team of experts needed to qualify your project.

The IRS has released an updated version of Form 8908 for claiming the Credit. This version of the form permits a taxpayer to claim both legacy projects and IRA-era projects simultaneously.

Stay Focused

You don’t have to be overwhelmed by Tangible Property and other Fixed Asset Regulations. We help you maximize your tax savings so you can focus on the core of your business.