Tax Incentive Permanently Extended for Energy-Efficient Commercial Building Property
On December 27, 2020, President Trump signed into law the 2021 Consolidated Appropriations Act (Act). While much of the attention surrounding the Act has been on modifications to the Paycheck Protection Program and direct stimulus payments to taxpayers, the Act also enhances another tax incentive by permanently extending the energy-efficient commercial building property (179D) deduction.
Originally enacted in 2005 and previously set to expire on December 31, 2020, 179D offers building owners or lessees accelerated depreciation deductions for the installation of energy-efficient commercial building property. The Act has made this previously temporary deduction a permanent deduction under tax law. 179D allows a first-year deduction of up to $1.80 per square foot that would otherwise be depreciated over 27.5 (residential) or 39 years (commercial). 179D applies to commercial buildings at any height and residential rental buildings that are four stories or more above grade. The following types of projects may qualify for 179D:
- Newly constructed buildings
- Additions to existing buildings
- Renovations in existing buildings
- HVAC, lighting, or building envelope upgrades to existing buildings
The 179D deduction can be up to $1.80 per square foot depending on how the building systems qualify. The total deduction can’t exceed the total cost of the qualifying property. There are two ways a building or building system can qualify for the 179D deduction:
1. $1.80 per square foot for a total energy use reduction of 50 percent or more compared to the applicable American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) standards.
2. Up to $0.60 per square foot for each of these building systems that exceed energy reduction thresholds compared to the applicable ASHRAE standards:
- HVAC – 15%
- Lighting – 25%
- Building Envelope – 10%
Changes Beginning in 2021
The Act made three changes to 179D for energy-efficient building property placed in service after December 31, 2020:
- Since its enactment, 179D has been a temporary deduction that had to be extended based on temporary expiration dates. The Act made 179D permanent, giving building owners the opportunity to consider this incentive in their long-term tax planning without fear of another expiration.
- Beginning January 1, 2021, the deduction amounts of either $1.80 or $0.60 per square foot will be adjusted annually for inflation.
- The criteria to qualify for the deduction will be more stringent starting in 2021. The applicable ASHRAE standards used to qualify property for 179D were changed from ASHRAE Standard 90.1-2007 to the most recent standard published two years prior to the start of construction of the subject property. This means future projects will need to be more energy efficient to qualify.
To claim the deduction, a certification report is required. The report should include the results of an energy use model using a U.S. Department of Energy-approved software program. The model must show energy use reduction compared to a reference building under the applicable ASHRAE standard. The year the property is placed in service determines the ASHRAE standard that applies. In addition, the certification requires a physical inspection of the qualifying building systems by a locally licensed engineer or contractor.
Prior-Year Projects Also May Qualify
If the qualifying building or building system was placed in service during a previous year, it may still qualify for the 179D deduction. Taxpayers are allowed to claim the 179D deduction on qualifying property placed in service between December 31, 2005, and December 31, 2020. Amended tax returns aren’t required. Instead, an adjustment to the depreciation schedule is made and the accelerated depreciation is caught up and taken in the current year via a change in accounting method and reported on Form 3115.
If you have built, added to, renovated, or upgraded at least 50,000 square feet of commercial building at any height or residential rental building that’s four stories or more above grade, BKD’s team of engineers and tax professionals can review the buildings in question, help you determine eligibility, and provide the required certification reports. For more information, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.