179D Tax Deduction: Accelerating Your Efficiency Project’s ROI
by Mike Troupos, CEM, CEP, and Brian Haverdink, MBA
Have you ever noticed that the IRS seems to love using three numbers and sometimes a letter to describe funds, policies, or codes? Many of us immediately think 401k, 503b, or 529 plan. However, there is a lesser-known IRS tax code that can save you significantly when you invest in energy efficiency for your commercial building; it is tax deduction 179D. Although it has been around for nearly 20 years, recent amendments have breathed new life into it, making it a highly strategic tax deduction to pair with energy efficiency projects.
What is the 179D tax deduction?
The 179D tax deduction was established in 2005 and offered rebates up to $1.80/ ft2 for commercial facilities that invested in efficient lighting, HVAC, and building envelope initiatives. It greatly benefitted companies building new facilities. If you constructed a 100,000 ft2 warehouse that qualified for all of 179D, you could be eligible for a $180,000 tax deduction. If your effective tax rate was 30%, you received $54,000. This tax code incentivized construction with energy efficiency in mind.
Section 179D was not exclusive to new construction either. In fact, the most popular route for the deduction was via lighting retrofits. While choosing only one of three categories (lighting, HVAC, and envelope) only resulted in 1/3 of the benefit at $0.60/ ft2, updating lighting carries a fast payback. Updating from T12 or metal halide lighting generally sees a total ROI in less than three years; the 179D benefit was the icing on the cake.
Pitfalls of the Original Tax Code
The big catch to this lucrative tax benefit was the timeline; it was only available for two years, as was typical for incentives of that era. Section 179D was renewed and extended several times in the early 2000s before expiring altogether and, eventually, retroactively reinstated in the 2010s. This retroactive approval made it difficult for building owners, design engineers, and construction firms to plan properly, and all but sent 179D to the background.
New Legislation Makes 179D Stronger Than Ever
However, this year, congress breathed new life into 179D by passing the Consolidated Appropriations Act of 2021, making it a highly valuable deduction to pursue. There were two major adjustments to the amendment:
1. Deduction Made Permanent – Congress amended the provision so that the tax deduction is now in place for all years moving forward unless amended otherwise. This means all projects being planned for 2021, 2022 and beyond can and should consider 179D as they are developing their building plans.
2. Updated Standards – Previously, each implemented system (lighting, HVAC, and building envelope) had to reduce the total annual energy and power costs by 50% or more in comparison to a reference building which met the minimum requirements of the ASHRAE 90.1–2007 Standard. The standards have been updated to say the systems must reduce annual energy and power cost by 50% or more in comparison to the most recent 90.1 published by ASHRAE or within two years of the construction project start date.
This consistency will likely result in major adoption of the tax credit moving forward. Detailed information on the requirements of the 179D benefit can be found here. The stability of this legislation means new energy efficiency projects can confidently proceed with clearer timelines on ROI and, hopefully, will incentivize more companies to pursue energy efficiency projects. Coordinating rebates and incentives for capital projects can be challenging, especially when navigating federal, state, and local options, but we are here to help.
A Criticism of the Amendment
While this helps building and project developers plan the finances around their future construction or retrofit projects, it does little (and even takes away from) the practicality of achieving energy efficiency levels that meet or exceed the standard. ASHRAE’s most recent codes are becoming more and more stringent on energy-efficient design. While new construction projects may have the ability to implement innovative solutions that will achieve better than 50% energy savings against the current standard, the existing building stock of our country will face a steep uphill climb.
Congress failed to consider that ratcheting the ASHRAE threshold up without also adjusting the 50% cost savings benchmark would alienate the most critical facilities in need of upgrades and increased efficiency. Time will tell what types of projects the amended standard will attract. Still, as a firm that works closely with commercial building operators, it would be a welcome adjustment to see the savings percentage minimums relaxed to be inclusive of an aging building stock here in the United States.
Future and Past Projects Can Qualify
That being said, this deduction is a great way to reduce your tax burden for capital projects. Did you build a facility or complete a lighting retrofit in past years without a 179D deduction? It's not too late to take advantage of it.
You can still receive the deduction even if you did the upgrades in past years by filing a tax amendment to document and prove the efficacy of the upgrades. Foresight can run the calculations required for your company to capture the 179D deductions for both new construction and lighting. So, if you are looking to implement an energy project or have in the past, reach out to us, and we can assist you in vetting if you qualify for the 179D deduction.
