In August 2022, the Inflation Reduction Act was signed that increased the benefits for Section 179D, Energy-Efficient Commercial Buildings.

The originally passed Section 179D legislation allowed owners of commercial buildings and developers of government owned buildings to claim a deduction for energy-efficient improvements made to the HVAC system, interior lighting system and the building envelope.  To claim this deduction, the taxpayer was required to show a 50% reduction in energy and power costs.  The maximum deduction was $1.88 per square foot of the building; however, a partial credit was allowed if the taxpayer couldn’t show savings in all three systems and the deduction could only be claimed once per property.

For property placed in service starting in January 2023 the following changes are in effect:

• Qualification threshold drops from 50% to 25% energy savings reduction
• Base deduction is $.50/per square foot of the building
  • Base deduction increases by $.02/per square foot for every percentage point of savings above 25%, limited to a maximum deduction of $1.00/per square foot
• If the project satisfies the prevailing wage and apprenticeship requirements, you can qualify for an additional deduction
  • $2.50 base deduction plus $.10/per square foot for every percentage point of savings above 25%, limited to a maximum deduction of $5.00/per square foot
• Savings are measured using the American Society of Heating, Refrigerating and Air Conditioning Engineers standard from four years prior to the in-service date of the building
• Deduction can be claimed every three years for subsequent energy-efficient improvements
• Expanded eligibility to other non-profit organizations and REITs
• Must obtain certificate of energy efficiencies to support deduction

Retrofit Projects

The Act created an alternative deduction path for retrofit projects based on reducing a building’s energy-use intensity by at least 25% or more compared to before the renovation. To qualify for this alternative deduction, a written retrofit plan must be prepared by a qualified professional.  The plan must specify building modifications expected to reduce the building’s energy use intensity.  The taxpayer also is required to obtain a certification verifying the energy-efficient modifications were completed and the actual energy use intensity post renovation. The deduction amount can’t exceed the total adjusted basis of the renovation property placed in service and will not be eligible for the deduction until the final energy-use intensity computation is completed.

Whether you are a real estate owner or have taken advantage of 179D energy efficiency tax incentives in the past, please contact your Polk representative to answer any questions you have on this matter or any others.

Polk & Associates

Large enough to serve a diverse clientele, yet small enough to maintain a hands-on approach, we are committed to maintaining the highest accounting and ethical standards with continuous education, extensive research resources, and excellent quality control.

Polk and Associates is a member of the Michigan Association of Certified Public Accountants, and the American Institute of Certified Public Accountants. The firm participates in the AICPA Peer Review Program, and has always received the highest level of award for its audit practice and quality control.