3 Steps to Help Clients Understand Energy Tax Deductions

Section 179D represents an opportunity for commercial real estate owners to convert their property into a tool for tax deduction. This section of the IRS rules and regulations is aimed at encouraging energy efficient construction and improvements to commercial buildings and residential building of 4 stories or more. Now, while some clients may be content with the simple explanation that this is a tax deduction and it can lessen their tax liability, others may require some convincing.
It typically involves an overview of how the 179D Tax Deduction works for them. The key is to explain the benefits of the deduction without overwhelming them with minute details.
The best way to help them understand section 179D is using the three-step process outlined below.

Step 1: What Qualifies

The most important step is to help your clients understand what is covered within the 179D Tax deduction umbrella. These are the systems that a building can use to qualify, and the elements that will allow for a deduction:

  • HVAC systems
  • The building’s envelope system
  • Lighting systems

Step 2: Elaborate On The Means For Qualification

Once it is clear which system can get a deduction, it’s important to understand how does one qualify for the 179D tax deduction. This is how it works out:

  • If the building’s new energy consumption is less than 50% of the standard model, then it can qualify for the full 179D tax deduction of $1.80 per sq ft
  • If the 50% threshold is not met, individual systems may still qualify.
    • For HVAC, a 15% energy reduction is required
    • For the building’s envelope system, a 10% reduction
    • For the lighting system, a 25% reduction is required
  • Each qualifying system grants a $0.60 Tax Deduction through 179D. And you can qualify for multiple systems.

Step 3: When can they make their claim

The rule was first made part of the IRS rules and regulations in 2006 and it’s from buildings constructed in that year and onwards which can claim these deductions for energy efficiency. The IRS has also provided provisions on how a building can be claimed on different tax years. Contact us for more information on this.
Explaining 179D is not difficult once you understand it better. These are only a few steps needed to elaborate on the energy efficient tax provision. And make your clients happier.