Section 179D Overview
A little-known provision of the tax code allows those who make buildings more energy-efficient to increase their profits dramatically — if they obtain the proper certification.
Section 179D (also known as EPAct) allows owners or designers of an energy-efficient building to take a deduction of as much as $1.80 per square foot in the year the project goes into service.
The deduction is available for reductions in the energy usage of these systems:
- Building envelope
- HVAC/hot water systems
- Interior lighting systems
The maximum deduction is given to projects that reduce their total energy costs by 50 percent or more. Failing that, there are subsystem deductions for significant energy savings: $.60 per square foot for the building envelope or the HVAC/hot water systems, and from $.30-.60 per square foot for lighting, depending upon the method used for qualifying the lighting system deduction.
The percentage of energy efficiency that earns the deduction depends on the year that a building is placed in service, as the following chart shows:
|Property||Under IRS Notice 2006-52||Under IRS Notice 2008-40||Under IRS Notice 2012-26||Benefit (per square foot)|
|Lighting (Interim rule)||25-40% LPD reduction||25-40% LPD reduction||25-40% LPD reduction||$.30-.60|
|Lighting (Permanent rule)||16 2/3% energy cost reduction||20% energy cost reduction||25% energy cost reduction||$.60|
|HVAC/hot water||16 2/3% energy cost reduction||20% energy cost reduction||15% energy cost reduction||$.60|
|Building envelope||16 2/3% energy cost reduction||20% energy cost reduction||10% energy cost reduction||$.60|
|Lighting + HVAC/HW + envelope||50% energy cost reduction||50% energy cost reduction||50% energy cost reduction||$1.80|
|Effective dates||1/1/2006 - 12/31/2008||1/1/2006 - 12/31/2013||1/1/2006 - 12/31/2020*|
* projects placed in service after 12/31/15 compared to an ASHRAE 90.1-2007 baseline standard
To claim the deduction, a building’s owner or designer must have the energy savings certified by a third-party, independent firm such as Concord.
The deduction is available for both new buildings and retrofits. It’s technology-neutral — not favoring any particular means of reducing energy use in a building system.
If the building is a government-owned property, such as a school or library, the government entity can allocate the deduction to one or more designers of the project. “Designer” is defined as anyone who creates the technical specifications for installing the qualifying property and its subsystems; it can include architects, engineers, contractors, environmental consultants, energy services companies (ESCOs) or others. The designer receives the deduction’s benefit — and the government entity receives the continuing benefit of lower energy costs.
Congress enacted Section 179D as part of the Energy Policy Act of 2005. It was intended to incentivize the building of energy-efficient properties and make a major impact on the goal of energy independence. Commercial buildings constitute a substantial portion of energy consumption in the U.S.; the lower energy bills caused by efficient design create real cost savings in both the private and public sectors. And Section 179D encourages innovations in design and construction methods.