Over $1 Billion
in Tax Savings
1000s
of 179D
Studies Performed
Multidisciplinary
Team
(Attorneys, Tax Professionals, Engineers)
PRECISE | RESPONSIVE | TRUSTWORTHY
01
What is the 179D Tax Deduction?
- Federal incentive that rewards energy-efficient construction and design
- Available for newly constructed, renovated, or expanded properties
- Deduction is per square foot – the larger the property, the larger the benefit
- The Inflation Reduction Act (IRA) increased the maximum benefit to $5.00/SF (with adjustment for inflation)
02
Who Can Claim the 179D Tax Deduction?
- Commercial building owners or tenants
- Owners of residential rental properties that are 4 or more stories above grade
- Real estate investors and developers
- Designers of government buildings or properties owned by tax-exempt entities (architects, engineers, contractors, environmental consultants)
03
Why Consider the 179D Tax Deduction?
- Lucrative energy-efficient deduction that can be incorporated into planning
- Under new legislation, incentive may be claimed every three or four years (assuming property continues to meet or exceed relevant energy standards)
179D for Owners & Developers
- Must demonstrate energy cost savings vs. a benchmark facility by impacting HVAC, lighting, or building envelope
- A qualified third party must perform an energy analysis, inspect the property, and provide certification
- May claim incentive on newly constructed,
renovated, or expanded properties - Best claimed in year of construction but may be claimed retroactively
- For projects in which construction began on/after 1.30.2023, must meet Prevailing Wage and Apprenticeship Requirements to maximize benefit
179D for Designers
- Architects, engineers, and designers may claim the Deduction when working on government buildings or properties owned by tax-exempt entities:
- K-12 Schools and Universities
- Non-Profits
- Hospitals
- Religious Institutions
- Military Bases
- Tribal-Owned Properties
- Building owner will allocate Deduction to designer
- There can be more than 1 qualifying design professional on a project
- Best used in a timely filing scenario, in a look-back situation would need to amend return
Interested in a Free Estimate of Benefits for Your 179D Study?
179D Tax Deduction Case Studies
New Construction: Hotel
Energy Saving
LED lighting
Efficient
Additional roof and wall insulation
Green
“Green” HVAC and controls
Affected Area
161,843 SF
179D Tax Deduction
$877,478 (max benefit of $5.36/SF)
New Construction: Midrise Multifamily Complex
Energy Saving
LED lighting
Efficient
Variable Refrigerant Flow (VRF) heat pump units
Rooftop Units
Gas-fired rooftop units (RTUs) for common areas
Affected Area
124,468 SF
179D Tax Deduction
$622,340 (max benefit of $5.36/SF)
Renovation: Part of State University System – Claimed By Designer
Energy Saving
Electrical construction and engineering firm designed and installed new controls for student gathering spaces and library
Affected Area
33,960 SF
179D Tax Deduction
$182,026 (max benefit of $5.36/SF)
01
Efficient Report Delivery
- 6 weeks for commercial building owners
- 3-6 months for designers
02
Subject Matter Experts
- Team has extensive understanding of Construction, Sustainability, Building Energy Codes and Standards, Energy-Efficient Design, Alternative Power Sources, and Energy Incentives
- Employ energy modeling specialists
03
Compliant and Defensible
- Inspections conducted by properly licensed, qualified individual according to NREL guidelines
- DOE-approved software is employed
179D 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.
What Exactly are the Prevailing Wage (PW) Requirements?
The “Prevailing Wage Requirements” state that contractors must pay mechanics and laborers no less than the prevailing wages required for federal work. The exact wage will vary by location and job description. www.sam.gov lists prevailing wages for most locations and job descriptions and Notice 2022-61 states that taxpayers can rely on wages listed there.
The PW requirements apply to facilities for which construction begins on/after 1/30/2023. If construction began prior to this date, the project may be “grandfathered” in, and able to claim higher benefit rates without needing to meet PW requirements.
What Happens if my Project Doesn’t Meet Prevailing Wage Requirements?
Unfortunately, if your project doesn’t meet PW requirements, the potential benefit will decline significantly. Instead of claiming $5.00/SF (plus inflation), you can only claim $1.00/SF (plus inflation.)
Here’s an example – a 4-story suburban garden apartment complex was recently constructed, with a total square of footage of 138,761. It demonstrated enough energy savings to be eligible for the maximum deduction value.
How Can I Claim the 179D Tax Deduction?
The property must be evaluated by an engineer or contractor licensed in the jurisdiction in which the building is located. 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.
How will the new tax law (One Big, Beautiful Bill Act) affect the 179D Deduction?
People have expressed concern that the new tax law is eliminating the 179D Deduction, but that’s not the case.
It’s true that the One Big, Beautiful Bill Act (OB3) assigned a sunset date to 179D – properties that begin construction after 6/30/2026 are not eligible for the Deduction. However, projects that begin construction before 6/30/2026 are eligible for the 179D Deduction – that means projects already in service, projects currently under construction, and projects that will begin construction in the next 12 months are all eligible. There’s still much opportunity to be had.
Plus, we have to remember that — over time — these types of incentives tend to phase-out and be reinstated, phase-out again and be reinstated again. Just because the new tax law assigned a sunset date doesn’t mean that 179D, or any energy incentives for that matter, will actually be eliminated.
How Can I Qualify for the 179D Deduction?
If you own energy-efficient commercial real estate — or design energy-efficient properties for a government or tax-exempt entity — you may qualify for the 179D Deduction. Let’s talk about your situation — we’re here to help.
Additional Information
Back
1. Introduction
The 179D Tax Deduction incentivizes energy-efficient commercial building construction and renovation.
To qualify, taxpayers must demonstrate a reduction in energy consumption versus a benchmark property. Energy-efficient improvements made be made to lighting, HVAC, or building envelope.
The deduction may be claimed on eligible commercial buildings of any size or eligible residential rental buildings at least 4 stories tall. The Deduction is claimed per square foot, so the larger the property, the larger the benefit.
Newly constructed buildings as well as properties that underwent major renovations/retrofits may be eligible.
LEARN MORE
1. Introduction
The 179D Tax Deduction incentivizes energy-efficient commercial building construction and renovation.
To qualify, taxpayers must demonstrate a reduction in energy consumption versus a benchmark property. Energy-efficient improvements made be made to lighting, HVAC, or building envelope.
The deduction may be claimed on eligible commercial buildings of any size or eligible residential rental buildings at least 4 stories tall. The Deduction is claimed per square foot, so the larger the property, the larger the benefit.
Newly constructed buildings as well as properties that underwent major renovations/retrofits may be eligible.
2. Who Can Claim the 179D Deduction?
Building owners and investors may directly claim the Deduction.
Owners of government buildings or tax-exempt properties may allocate the Deduction to the architects, engineers, or designers of those projects. There may be more than 1 qualifying design professional on a project, and the owner must provide a formal Allocation Letter.
3. Documentation and Certification Requirements
To claim the Deduction, a qualified third party must perform an energy analysis, inspect the property, and provide certification. The site visit must be performed by an engineer or contractor licensed in the jurisdiction in which the building is located. Additionally, modeling software will be employed to simulate building energy consumption and ensure that it meets established ASHRAE standards for efficiency.
Taxpayers must provide supporting documentation that may include plans, scopes of work, model numbers, photographs, etc.
4. Impact of the Inflation Reduction Act
The Inflation Reduction Act boosted the potential Deduction maximum to $5.00 per square foot (adjusted for inflation.)
However, to meet that maximum, taxpayers must meet the Prevailing Wage and Apprenticeship Requirements. The Requirements mandate that contractors must pay mechanics and laborers no less than the prevailing wages required for federal work. The exact wage will vary by location and job description.
If these Requirements are not met, the potential Deduction maximum drops to $1.00/SF.
The incentive was one-time Deduction until the passing of the Inflation Reduction Act. The IRA established a “reset,” allowing the incentive to be taken once every 3 years on a commercial building, and once every 4 years on a building owned by a tax-exempt entity. This will be very beneficial for energy-conscious developers dealing with long-term multiphase projects.
5. When Should You Consider a 179D Study?
It is best to claim the 179D Deduction in the year in which your property or renovation was placed-in-service, but it may be claimed retroactively.
The savvy taxpayer will consider a 179D study in conjunction with design and construction timelines. Ideally, studies should be performed near project completion or shortly afterwards. A timely study ensures that the contractor will easily be able to provide information while the project is still fresh in his mind, and the taxpayer will be able to maximize benefit from Day 1.
Incorporation of 179D into a cost segregation study can be a seamless add-on, and an excellent complement. Many taxpayers complete both studies simultaneously.
6. Why Partner With a 179D Specialist?
To fully leverage and successfully claim any incentive, you need to find the right partner. You want to maximize your benefit while avoiding common pitfalls – and that takes guidance from the right expert.
The Capstan Tax Team offers:
- Tax, legal, and technical professionals
- Experience with all property types – 1000s of 179D studies performed, resulting in over $1billion in tax savings
- Solid working relationships with CPAs – we’ll work together and make it easy
- Detailed, meticulous site visits and reporting that exceeds IRS guidelines
- A tailored approach to comprehensive tax savings that is customized for your needs
7. Conclusion
The 179D Energy-Efficient Construction Deduction rewards taxpayers for going green. The IRA has boosted the potential benefit and established a reset that permits multiple Deductions.
To make the most of this incentive, and integrate it into your holistic tax plan, it’s crucial to plan proactively and solicit expert guidance. The 179D Specialists at Capstan are here to help with no-commitment estimates, insightful analysis, and personalized advice.
Contact the 179D Team today.