Section 179D Tax Deduction of the IRS Code allows federal deductions for the installation of energy efficiencies in real property.
Designed to incentivize sustainable building in the public and private sectors, §179D permits a tax deduction of up to $1.80 per square foot for energy-efficient upgrades to both existing buildings and new construction. Specifically, the possible maximum deduction is $.60 for lighting, $.60 for HVAC systems, and $.60 for building envelope when those systems exceed ASHRAE Standard 90.1-2001 by certain percentages. Typically, the building owner takes the deduction, but in the case of public buildings owned by local, state, or federal governments, the deduction may be allocated to the designer, such as the architect or engineer, that designed the improvements. Designers must seek certification from third party firms to ensure that their projects qualify for §179D.
As an example, if a lighting system retrofit that cost $100,000 and services 100,000 square feet of commercial space exceeds the ASHRAE 2001 standards by at least 16 and 2/3 % the owner of the system may be eligible for $60,000 in federal tax deductions in the year it was put in service. The remaining $40,000 of expense would be capitalized and deducted over 39 years.
In the same example, if there was a $50,000 rebate or incentive the deduction would be limited to $50,000… their out of pocket cash payment. The additional $10,000 would not be available and the lighting system would be fully depreciated in the year it was put in service.
With its $1.80 per square foot tax deduction, §179D may represent significant savings for building owners and designers of energy-efficient upgrades. For example, Capital Review Group had one client that received a deduction of over $516,000 for retrofits to its 287,000 square foot auto dealership. The improvements, which included the installation of a new HVAC system, solar skylights, and LED lights, significantly enhanced both the customer experience and the building owner’s bottom line. Another CRG client, a large architectural firm, amassed nearly $7,000,000 in deductions over five years after it designed sustainable upgrades for several government buildings.
Please note to take advantage of this tax saving opportunity, the energy efficient systems must have been placed in service between January 1, 2006 and December 31, 2014. Also, to claim this deduction there is no need for amending a previous year’s tax filing. Your accounting firm can simply file a Form 3115 – Application For Change In Accounting Method.
For a deeper overview of §179D see the SlideShare below provided by Capital Review Group: