While tax season for the year 2021 is officially in the rear-view (amen!), it’s never too early to get started on saving money on next year’s taxes.
Thus, let’s focus our attention on something you (and your clients) may not be utilizing but should be: 179D. The Commercial Buildings Energy Efficiency Tax Deduction — identified simply as 179D, the Energy Policy Act of 2005, or EPAct 179D — enables building owners to claim a tax deduction for installing qualifying systems in buildings. Essentially, the deduction is an energy-related incentive, rewarding taxpayers for making their buildings more energy efficient or implementing alternative energy sources.
The incentivized areas include lighting, HVAC, and the building envelope. The amount that can be deducted depends on the breadth of the project's efficiency improvements. The more energy efficient the project is, the greater the amount. Both new construction and retrofit projects completed since 2006 are eligible for the incentive. For work completed on government buildings, the deduction is earmarked specifically for the project's designer.
Approximately two years ago, legislation was passed making 179D permanent. When that occurred, a clause was created that increased the incentive based upon the level of inflation. Currently, the maximum deducation is valued at $1.82 per square foot. That amount is likely to increase in 2022 to as much as $2 per square foot or more.
Commercial assets depreciate over time. The 179D incentive separates that depreciation. It allows a property's 39-year schedule fully deductible in year one. Rather than gaining 1/39th of an incentive each year, stakeholders can obtain the entire amount upfront.
What Areas Are Included?
Projects are rewarded based on the “affected square footage.” For example, a roof replacement would impact the entire square footage, as would a chiller upgrade, thus, these projects would be eligible for the entire square footage of the facility, so long as specific parameters are met.
Also of interest, stakeholders may benefit on previously installed systems. For example, let's imagine your firm (or a client) was working on a building built in 2005 that utilized ground-source heat pumps with an insulation R value of 100 in the walls and roof. Last year, LEDs were added throughout the building. This is great in theory, though the LEDs aren’t really going to provide a great deal of energy savings, as the building is already benefiting from the heat pumps and insulation. Even though the LEDs aren't doing the heavy lifting, the project may still be eligible for the full $1.82 per square foot.
What Metrics Are Used?
Regardless of the state of the facility, to achieve the full value of the incentive, an energy reduction of 50% compared to the applicable year of ASHRAE Standard 90.1 must be achieved. For projects completed in 2006-2015, ASHRAE Standard 2001 is the metric that is used. For projects completed in 2016-2020, ASHRAE Standard 2007 is used. For projects completed in 2022 and beyond, ASHRAE Standard 2007 will be utilized until the Secretary of Energy affirms ASHRAE Standards 90.1 2016/2019.
Some buildings are lighting-driven and others are HVAC-driven. For lighting, the prescriptive method is based on watts per square foot with a maximum benefit of 61 cents per square foot. The improvement must be between 25%-40% better than the ASHRAE standard. The lighting requirements are quite relaxed in ASHRAE 2007 when compared to the updated standards, so pay attention to which version applies to your project.
When using the modeling or whole-building method, which is necessary to achieve the $1.22 and $1.82 per square foot deductions, an energy model must be performed. The overall building energy usage must be a certain percentage better than that of the referenced ASHRAE standard, which, for the full $1.82 per square foot is 50%.
Seal the Deal
When you stack each dollar of cost savings an efficiency project affords — from the energy savings itself to a variety of utility rebates to a potential $1.82 per square foot tax incentive — it all adds up. Use your firm's reputation to get clients to the table and then utilize this layered cost-savings approach to help justify the project.
Editor’s Note: I am not a tax expert. Jacob Goldman, LEED AP, vice president of Energy Tax Savers, is. The majority of the information disseminated here was provided during a presentation he gave at AEE East. For more information, or if you have any questions regarding 179D, connect with him on LinkedIn.