Understanding the 179D Tax Deduction: A Guide for Commercial Property Owners
CSSI President Matt Fossey has some sage advice for commercial property owners looking for ways to boost their investments and keep their operational costs in check:
“Look into the Section 179D tax deduction. It’s a handy but sometimes overlooked tool that can help you save big on energy-efficient upgrades for your buildings.”
Let’s dive into how this deduction works and how it can benefit you.
How 179D Deductions Can Offset the Cost of Energy-Efficient Building Upgrades
Introduced as part of the Energy Policy Act of 2005, the Section 179D deduction was designed to encourage property owners to make energy-efficient improvements in their commercial buildings.
“For owners looking to make significant upgrades, such as installing energy-efficient HVAC systems, lighting, or building envelope improvements, the 179D deduction can provide substantial financial relief,” says Fossey.
The deduction amount is calculated based on the energy savings achieved through each of the upgrades.
For the tax years 2023 and beyond, the deduction can be up to $5.00 per square foot of the building space that meets the required energy efficiency standards.
So, for example, if you own a 10,000 square-foot commercial property and you qualify for the maximum deduction, you could potentially save up to $50,000 on your tax bill.
How to Qualify for 179D
To take advantage of the 179D deduction, your building improvements must meet specific energy efficiency standards. Here’s a breakdown of what you need to know:
Requirements
The energy-efficient improvements must achieve a reduction in energy and power costs.
Specifically, the improvements should reduce energy and power costs by at least 50% compared to a building that meets the ASHRAE Standard 90.1-2007, which serves as the benchmark.
Qualified Improvements
The deduction covers three main types of improvements:
- Lighting Systems
- HVAC Systems
- Building Envelope, including insulation, windows, and doors that contribute to energy savings.
Certification
To qualify for the 179D deduction, you need to obtain certification from a qualified third-party engineer or contractor. This certification verifies that your building improvements meet the necessary energy efficiency criteria.
Timing
All improvements must be completed and placed into service before the end of the tax year in which you claim the deduction.
How 179D Deductions Can Improve ROI on Energy Efficiency Investments
Investing in energy-efficient upgrades can offer a whole host of benefits beyond just the immediate tax savings. Here’s how the 179D deduction can positively impact your ROI:
Reduced Operating Costs
Energy-efficient systems consume less energy, leading to lower utility bills.
Over time, these savings can be substantial, providing a return on your investment that extends well beyond the tax deduction.
Increased Property Value
Buildings that are energy-efficient often have higher market value. The 179D deduction can make these improvements more affordable, potentially enhancing the overall value of your property.
Enhanced Tenant Attraction and Retention
Energy-efficient buildings are more attractive to tenants who are looking to lower their own energy costs and operate in environmentally conscious spaces.
Compliance with Future Regulations
By making these upgrades now, you can future-proof your property and avoid potential costs associated with retrofitting to meet new regulations.
“Investing in energy efficiency not only contributes to a greener environment but also enhances the financial performance of your property,” Fossey says. “By leveraging the 179D deduction, you can make these investments more affordable and reap the rewards for years to come.
We can help you understand the qualifying standards and requirements, so you can make informed decisions about which improvements are right for you.”