Section 179D: Energy-Efficient Commercial Building Deduction

It is estimated that only 10 percent of qualifying projects take advantage of the 179D deduction. The Commercial Building Deduction, a part of the 2005 Energy Policy Act, encourages owners of commercial buildings reduce their energy consumption with a tax incentive which in turns also reduces building energy costs.

How 179D Works

Owners of commercial buildings are eligible for a Federal tax deduction of between $0.30 and $1.80 per sq. ft. of the building’s total area. These installations may include:

  • Lighting systems (interior)
  • Heating, Ventilation, and Air Conditioning (HVAC)
  • Hot water systems
  • Building Envelope
  • Controls and Management Systems

In order to get the maximum deduction of $1.80 per sq. ft., the energy and power costs have to be reduced by a minimum of 50 percent as compared to a reference building. If the commercial building doesn’t achieve 50 percent, it can still qualify for a deduction of between $0.60 and $1.20 per square foot.

To qualify for partial deductions, the building envelope should have a savings of 10% or more. For lighting, hot water systems, and HVAC, a 25% and 15% improvement threshold must be reached.

A Few Examples of Energy-Efficient Systems and Building Materials

  • High-efficiency insulation in ceilings, walls, floors, and roofs
  • Energy-efficient lighting fixtures
  • Automatic thermostats and lighting controls as well as other monitoring equipment
  • Ultra-efficient cooling systems, and furnaces
  • Ventilation control
  • Enhanced fan efficiency
  • Day lighting

Government Building ‘Designers’: Special Rule

According to a special rule, a government entity can assign the deduction to a person who designs the building or systems, such as architects or the engineers. The deduction can also be assigned to the contractors for developing the building and using efficiency upgrades, such as HVAC and lighting systems.