The Section 179D Deduction is Here to Stay!

• January 14, 2021
• Carey M. Heyman, CPA

The Energy Efficient Commercial Buildings Deduction (Section 179D) became a permanent addition to the Internal Revenue Code on December 27, 2020 upon the President’s signing of the Consolidated Appropriations Act, 2021, which included the Taxpayer Certainty and Disaster Tax Relief Act of 2020.

Section 179D permits a first-year tax deduction for energy efficient improvements made to a new or remodeled commercial building.  The deduction is equivalent to $1.80 per square foot.  Partial deductions are allowed for any one of the three systems defined below that reach a required percentage of savings, with the deduction for each system capped at $0.60 per square foot.  As an example, a qualifying 200,000 square foot commercial building would be eligible for a Section 179D deduction of up to $360,000, as long as it meets the minimum requirements outlined below. Beginning in 2021, the rate by which the deduction is calculated will be adjusted for inflation. 

For the purposes of the Section 179D deduction, an energy efficient commercial building is defined as:

• A property that is eligible to be depreciated.

• The improvements made are to the building envelope construction, the interior lighting systems, or the heating, cooling, ventilation, and hot water systems.

• The improvements installed on or in any commercial building located in the United States meet the minimum requirements established by the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) and the Illuminating Engineering Society of North America.  Under the new legislation, owners and designers are encouraged to continually increase the energy efficiency of commercial buildings.  An updated set of standards issued by ASHRAE is referenced in the new legislation.  Further updates to the minimum requirements will not require subsequent legislation.

• The improvements made are certified as part of a plan that was designed to reduce the total annual energy and power costs by 50% or more, as defined by ASHRAE.  Such improvements must be tested and certified to attain the specific savings.

Sources: IRS.gov; Energy.gov; RIA Checkpoint; Bloomberg Tax

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