179D Tax Deduction Benefits
179D Tax Benefits can be a complicated series of requirements and savings. Below are some of the most frequently asked questions we have received. If you want to take advantage of 179D Tax Benefits, review these questions.
What is the legacy 179D tax deduction program?
If Energy Efficient Commercial Building property was placed in service between 1/1/2006 and 12/31/2022, it would be considered a legacy 179D opportunity, Section 179D is an engineered-based tax incentive available for the reduction of energy and power costs in commercial buildings. The incentive was initially enacted under the 2005 Energy Policy Act (EPACT) and allows for a tax deduction of up to $1.80 per square foot. The 179D Tax Deduction specifically applies to those commercial buildings that notably reduce their interior lighting energy costs, as well as heating, cooling, and building envelope. the projects may qualify for the whole building deduction of $1.80/sf (plus inflation adjustments when applicable) or a partial deduction of $0.60 for HVAC, $0.60 for building envelope, and $0.60 for Lighting systems. (plus inflation adjustments when applicable).
What types of buildings can qualify?
- Commercial Buildings of any type
- Apartment Buildings of 4 Stories or more
- Government-owned buildings
- Parking Garages (prior to 1/1/2023)
- All Tax Exempt owned commercial buildings (Placed in service after 1/1/2023)
What type of projects can qualify for a 179D Tax Deduction?
The section 179D tax incentive was developed with a technology neutral approach. In general, new construction as well as retrofits with improvements made in a building’s lighting, HVAC, or envelope systems which reduce energy consumption and can be properly modeled by one of the DOE approved software, can qualify. These include energy management systems, VFD’s, heat recovery, motion sensors and many others.
What is required to take a Section 179D Deduction?
The IRS has provided guidance on the requirements needed to satisfy a Section 179D Deduction. Walker Reid Strategies will provide all the documentation meeting and exceeding these requirements.
Can a Nonprofit qualify for a 179D deduction?
YES! Starting after 1/1/2023 any tax-exempt entity that has a commercial building eligible for a section 179D Tax Deduction may allocate the deduction to the designer that is primarily responsible for the design of the energy-efficient commercial building property.
Do outdoor and parking lot lights qualify for 179D?
Lighting systems eligible for a 179D deduction are specific to the interior of buildings only.
Does a 179D Deduction affect my state taxes?
Although many states do allow for federal expensing and depreciation provisions such as 179D, the current treatment should be verified on a state by state basis.
Has My CPA already performed the 179D Tax Deduction?
It is possible that your CPA has taken other deductions but not necessarily the 179D Tax Deduction. The deduction is an engineering based approach that CPA’s typically are not qualified to perform in their day to day functions. We would be happy to discuss this further with your CPA and provide any information that your CPA may want regarding the deduction.
Is there a limit on the amount of a 179D deduction I can take?
Depends on what year the energy-efficient commercial buildings property is placed into service.
From 1/1/2006 to 12/31/2022 the max available section 179D Tax Deduction is limited to $1.80/sf (plus inflation adjustments if applicable)
After 1/1/2023 the 179D is enhanced to a maximum of $5.00/sf (plus inflation adjustments if applicable)
Can I claim the 179D Tax Deduction on a building more than once?
Starting in 2023, privately owned commercial buildings can recertify the buildings for section 179D Tax Deduction once every 3 years (if new energy-efficient commercial building property is installed on the building) and tax-exempt entities may recertify the building once every 4 years. (if new energy-efficient commercial building property is installed on the building)
Do I have to amend my returns for property placed in service in previous years?
For commercial building owners, a Change in Accounting Method Form 3115 may be used to take a 179D deduction in the current year’s tax filing to avoid amending the previous year’s tax returns.
For designers/contractors of government-owned and tax-exempt buildings, it is required to amend tax returns for projects that were placed into service in a previous year.
If I purchased an energy efficient building, can it qualify for a 179D deduction?
In order to benefit from the 179D tax incentive, the building owner must have installed property as part of a plan designed to reduce the total annual energy and power costs. Simply purchasing an existing energy efficient building will not meet these requirements.
I want to take advantage of the 179D Tax Deduction, what’s the next step?
Contact Walker Reid Strategies today and we will get you started. After a brief conversation determining viability, a 179D adviser will initiate the process for a full energy and financial benefit analysis.
How long does the process take?
A typical time frame for a full 179D Study is 4-6 weeks. Projects with full sets of design documents and immediate access for inspections will often result in shorter turn around times. For projects with shorter deadlines, please contact us for an assessment.
What is your audit defense policy?
Walker Reid Strategies provides full audit defense through appeals, we can explain our audit policy in more detail during our initial consultation.
What information do you need to certify a building for a 179D Deduction?
Walker Reid Strategies is committed to limiting our clients internal efforts and costs when pursuing a 179D certification. Any project information which cannot be effortlessly provided will be field gathered during the site inspection.
Does a 179D Allocation affect a government building owner or tax exempt building owners?
Government and Tax Exempt building owners are required to reduce the basis of the energy-efficient commercial building property by the amount of the 179D deduction allocated. Because it is not typical for a state agency to file an income tax return or to keep tax depreciation records, governments should not be at all affected by adjusting tax basis in the property. GAAP books and records are not affected by a tax basis reduction.
Who must sign the allocation letter?
IRS guidance simply states that an “authorized representative of the owner of the government-owned building” must sign the declaration of the allocation letter. Typically, this would be any personnel familiar with the project and having the ability to verify information such as completion date and cost of the project.
45L Tax Credit
Below are some of the most frequently asked questions we have received. If you want to take advantage of of the benefits, review these questions.
What is the 45L Tax Credit?
Section 45L is an engineered-based tax credit available to builders and developers for the reduction of energy usage in residential buildings. The incentive was initially enacted under the 2005 Energy Policy Act (EPACT) and allows for a significant per unit tax credit.
What are the qualifying requirements?
For Legacy projects placed service prior to 1/1/2023
- Qualifying units are required to have been sold or leased for use as a residence during the tax year.
- Qualifying units must meet or exceed a 50% reduction in savings compared to 2006 IECC Standards
- The units must be modeled by a HERS Rater (or equivalent) substantiating the savings.
For projects initially leased or sold after 1/1/2023
Projects must be certified for Energy Star or Zero Energy Residential Homes Programs
What type of residential buildings may qualify?
In General, a dwelling unit is defined as one or more rooms including a kitchen and designed as a unit for occupancy by one family for the purpose of cooking, living and sleeping. In order to meet the requirements of Section 45L.
- Single Family Homes
- Multi-Family Homes
- Apartment or Condo Buildings of 3 Stories or less
Can Taxpayers Amend tax return in order to benefit from a Section 45L Tax Credit?
Yes. In General, tax returns may be amended up to 3 years from the date the return was filed.
Can Low Income Housing (LIHTC) also qualify for 45L?
Yes, the requirements for a 45L Tax Credit are specific to energy efficiency. Tax code does not currently restrict Low Income Housing from qualifying for a 45L Tax Credit.
Has My CPA already taken advantage of the 45L tax credit?
It is possible that your CPA has taken other deductions but not necessarily the 45L tax credit. The study is an engineering based approach that CPA’s typically are not qualified to perform in their day to day functions. We would be happy to discuss this further with your CPA and provide any information that your CPA may want regarding the credit.
Is there a limit on the amount of a 45L deduction I can take?
The limitation is only based on the applicable per unit tax credit amount that applies to the specific property in question depending on the year in which the project is initially sold or leased.
Additionally, tax payers should verify with their CPA that they will not be restricted in the use of the credits due to AMT (Alternative Minimum Tax)