The 179D commercial buildings energy efficiency tax deduction primarily enables building owners to claim a tax deduction for installing qualifying systems in buildings. Tenants may be eligible if they make construction expenditures. If the system or building is installed on federal, state, or local government property, the 179D tax deduction may be taken by the person primarily responsible for the system’s design. The 179D tax deduction does not apply to other non-tax paying entities, including but not limited to NGOs or churches, unless there exists an energy-as-a-service agreement that is owned by a tax paying company. Please see IRS Notice 2008-40 for additional information. The 179D tax deduction has been in effect since January 1, 2006, and is now a permanent program enacted as part of the Consolidated Appropriations Act of 2021 signed into law on December 27, 2020.
The following information is still applicable for properties placed into service on or before December 31, 2020. Updated information will be made available for properties placed into service on or after January 1, 2021, upon anticipated IRS Notice release.
A tax deduction shown in the table below (up to $1.88 per square foot) is available to owners of new or existing buildings who install (1) interior lighting; (2) a building envelope; or (3) heating, cooling, ventilation, or hot water systems that reduce the energy and power cost of the interior lighting, HVAC, and service hot water systems by 50% or more in comparison to a building meeting minimum requirements set by ASHRAE Standard 90.1. Cost savings must be calculated using qualified computer software, which we link to below.
For properties placed into service on or before December 31, 2020, the energy and power cost shall be compared with the minimum requirements of ASHRAE Standard 90.1-2007. Projects placed into service on or after January 1, 2021, shall use the most recent Standard 90.1 affirmed no later than the date that is 2 years before the date that construction of the qualifying property begins, or the date the construction permit of the qualifying property is issued. Details and associated updates to this webpage are awaiting an anticipated IRS Notice.
Deductions shown in the table below (up to $0.63 per square foot) are also available to owners of buildings in which individual lighting, building envelope, or heating and cooling systems partially qualify by meeting certain target levels or through the interim lighting rule. For properties placed into service on or before December 31, 2020, following IRS Notice 2012-26, choose the appropriate compliance pathway shown in the table below. Updates for properties placed into service on or after January 1, 2021, will be made available upon anticipated IRS Notice release.
SUMMARY OF 179D TAX DEDUCTIONS
|Compliance Path||Savings Requirement*||Tax Deduction**|
|taxable years before 2021||taxable year beginning 2021||taxable year beginning 2022|
|Fully Qualifying Property||50%||$1.80/ft²||$1.82/ft²||$1.88/ft²|
|Partially Qualifying Property||Envelope||10%||$0.60/ft²||$0.61/ft²||$0.63/ft²|
|HVAC and HW||15%|
|Interim Lighting Rule||25%–40% lower lighting power density (50% for warehouses)||$0.60/ft²***||$0.61/ft²***||$0.63/ft²***|
* Savings refer to the reduction in the energy and power costs of the combined energy for the interior lighting, HVAC, and hot water systems as compared to a reference building that meets the minimum requirements of ASHRAE Standard 90.1-2007 for properties placed in service on or before December 31, 2020. Savings percentages based on IRS Notice 2012-26.
** Not to exceed cost of qualifying property
*** The tax deduction is prorated depending on the reduction in Lighting Power Density (LPD). See IRS Notice 2006-52 for the definition of "applicable percentage."
Below are links to qualified software and technical references that are required to calculate your tax deduction for properties placed into service on or before December 31, 2020. Updates will be made to qualified software and technical references for properties placed into service on or after January 1, 2021, upon anticipated IRS Notice release.
Systems and Buildings Placed in Service On or Before December 31, 2020
DOE has an established process for qualifying software for modeling systems and buildings. The webpage lists qualifying software for projects placed in service on or before December 31, 2020.
Updates will be made for properties placed into service on or after January 1, 2021, upon anticipated IRS Notice release.
Energy Savings Modeling and Inspection Guidelines for Commercial Building Federal Tax Deductions for Buildings 2016–2020, published by NREL, provides guidelines for the modeling and inspection of energy savings required by the statute for buildings and systems placed in service on or before December 31, 2020. Additional resources will be added for properties placed into service on or after January 1, 2021, upon anticipated IRS Notice release.
IRS Internal Revenue Bulletin 2021-48 provides increased adjustments on the amount of the deduction for taxable years of 2021 and 2022, respectively, and for both fully and partial qualifying properties due to inflation.
IRS Notice 2012-26 provides an additional set of energy savings percentages that taxpayers may use to qualify for a partial 179D deduction under the permanent rule for property placed in service on or after the effective date of the notice.
IRS Notice 2008-40 sets forth additional guidance relating to the deduction for energy-efficient commercial buildings under 26 U.S.C. 179D and is intended to be used with Notice 2006-52.
IRS Notice 2006-52 established a process to allow taxpayers to obtain a certification that the property satisfies the energy efficiency requirements contained in 26 U.S.C 179D