Energy-Efficient Tax Incentives: The 179D Deduction

This is the second in a 3-part series focusing on energy-efficient tax incentives.  

The Inflation Reduction Act of 2022 has brought energy incentives back into the spotlight, with taxpayers eager to leverage the expanded opportunities. The rules around the various incentives have significantly changed in the last two years; therefore, a refresher is warranted. 

What is the 179D Deduction?  

The 179D Deduction is a federal incentive that rewards energy-efficient construction and design. The Deduction is available to builders, developers, or – in certain cases – designers of: 

• Commercial buildings 
• Residential rental properties that are 4 or more stories above grade 

The deduction may be claimed for ground-up energy-efficient construction projects or energy retrofits. Property owners must demonstrate a reduction in energy consumption versus a benchmark standard.  

The deduction is calculated by square footage, with larger properties receiving larger benefits.  

Legacy 179D Program 

Before the passing of the IRA, the 179D Deduction was determined by evaluating improvements in three key areas: 

• Interior Lighting 
• HVAC 
• Building Envelope 

Each area could provide a benefit of $0.63/SF for a potential maximum deduction of $1.88/SF. Claimants had to demonstrate a minimum 50% reduction in energy consumption versus a set benchmark. At this time, the Deduction was a one-time incentive.  

179D Deduction Under the IRA 

The IRA brought sweeping changes to the 179D Deduction:

• Claimants must only demonstrate a minimum of 25% reduction in energy consumption versus the benchmark, making qualification easier 
• The Deduction may be taken once every 3 years on a commercial building and once every 4 years on a building owned by a tax-exempt entity – beneficial for long-term multiphase projects 
• Designers of government buildings have long been able to benefit from the 179D Deduction through allocation. The IRA expanded the benefit to designers of tax-exempt entity properties 

Expanded Benefit Under the IRA (With a Caveat) 

Deduction value depends on how much energy efficiency has increased over baseline, with a minimum of a 25% increase and a maximum of a 50% increase. For every 1% of energy saved, the deduction value increases incrementally.  

The value of the incremental increase – and the initial Deduction value – will vary according to the satisfaction of Prevailing Wage and Apprenticeship Requirements (PWA).   

The PWA Requirement applies to facilities for which construction began on or after 1/30/2023 and states that mechanics and laborers must be paid no less than the prevailing wages required to be paid for federal construction work. (The wage will vary based on exact job description and geographic location.) Sufficient records must be kept. 

There is one notable exception – projects that commenced construction before 1/30/2023 and went into service after 1/30/2023 are eligible for the full deduction and are not required to meet PWA requirements.  

Maximize 179D Deductions  

Meeting the PWA Requirements is key to optimizing the 179D Deduction under the IRA. If the PWA requirements are unmet, the benefit will drop below pre-IRA levels.  

The EisnerAmper team can guide taxpayers in maximizing 179D benefits wherever possible.