The 179D Energy-Efficient Commercial Buildings Tax Deduction has been around since 2006, and the benefit was made permanent with the Consolidated Appropriations Act of 2021. This is a big incentive for developers and commercial property owners: they can qualify for a credit federal tax credit of $1.88 per square foot or a partial tax credit of up to $0.63 per square foot.
Building owners can obtain the 179D tax credit if they achieve savings of at least 50% over the performance level required by ASHRAE Standard 90.1. These savings must be achieved through a combination of energy efficiency measures in four main areas: lighting, building envelope, HVAC systems and hot water systems.
Get a professional energy audit and claim all available incentives for upgrading your building.
There are two important requirements when claiming the energy efficiency tax credit for a building. Savings must be calculated relative to the most recent version of ASHRAE 90.1 and must be demonstrated with IRS-approved energy modeling software. The tax credit is available for both new construction and existing buildings, with the deduction typically claimed by the building owner. However, tenants may qualify if they assume the cost of energy upgrades.
What building upgrades qualify for the energy efficiency tax credit?
As mentioned above, the 179D tax credit focuses on four areas: indoor lighting efficiency, building envelope performance, HVAC efficiency, and water heating efficiency. By achieving 50% savings with a combination of energy upgrades, the building becomes eligible for a tax deduction of $1.88 per square foot. The Database of State Incentives for Renewable Energy and Efficiency ( DSIRE ) presents a list of key technologies and upgrades covered by the tax credit:
- Equipment Isolation
- Water heaters
- Lighting
- Lighting controls/sensors
- Coolers
- Ovens
- Boilers
- heat pumps
- Air conditioning
- Caulking/Caulking
- Duct/air seal
- Building insulation
- windows
- Siding
- Roofs
- Tankless Water Heaters
Other energy efficiency measures that target the four performance areas also qualify, as do building-wide improvements. In all cases, the building must use IRS-approved software to demonstrate a 50% savings.
In general, the 179D energy efficiency tax credit is available for commercial buildings that use electricity or fossil fuels. The tax deduction is not available for single-family homes and multi-family buildings up to three stories. Religious organizations also do not qualify as they are exempt from taxes. In public buildings, the deduction can be claimed by the designer.
Which buildings receive the partial energy efficiency tax credit?
Partial tax credit of $0.31 to $0.63 per square foot is available for buildings that achieve specified performance levels with individual building systems. There are two options, which are summarized in the following table:
|
Partial tax credit option |
Requirements |
|
Partially qualified property |
10% savings on envelopes 15% savings on HVAC and hot water 25% lighting savings |
|
Interim Lighting Rule |
25% – 40% reduction in lighting power density (50% reduction for warehouses) |
Regardless of the tax credit achieved (full or partial), it cannot exceed the cost of the energy upgrades that were used to claim the benefit. Building owners should also be aware that the 179D tax deduction can only be claimed for entire properties and not specific areas. For example, if certain parts of a building meet required savings but the entire property does not, you will not be able to claim a tax credit for those specific areas.
The same building may qualify for the 179D energy efficiency tax credit and the federal solar tax credit since they are separate incentives. However, electricity savings achieved with solar panels do not count toward energy efficiency tax credit requirements.
IRS Approved Software for Energy Modeling
The 179D energy efficiency tax credit is only available to building owners who can demonstrate their performance with IRS-approved energy modeling software. The US Department of Energy provides a list of available options: DesignBuilder, DeST, DOE-2.2, EnergyGauge, EnergyPlus, eQuest, Hourly Analysis Program (HAP), IES Virtual Environment, OpenStudio with EnergyPlus, TAS, TRACE 3D Plus, TRACE 700 and TRNSYS.
