Tax Incentives Extended for Energy-Efficient Commercial Building Property

Pillars on a Government building

On December 20, 2019, President Trump signed the Further Consolidated Appropriations Act, 2020 (Act) into law. While much of the Act deals with budget appropriations, it also extends several expired or expiring tax incentives, including the energy-efficient commercial building property (179D) deduction.

Background

Originally enacted in 2005 and previously expired on December 31, 2017, 179D offers building owners or lessees accelerated depreciation deductions for the installation of energy-efficient commercial building property. The Act has extended 179D retroactively for qualifying building systems placed in service from January 1, 2018, through December 31, 2020. 179D allows a first-year deduction of up to $1.80 per square foot that would otherwise be depreciated over 27.5 years (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

179D Calculation

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 American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) Standard 90.1-2007.
  2. Up to 60 cents per square foot for each of the following building systems that exceed energy reduction thresholds compared to the applicable ASHRAE standards:
    1. HVAC – 15%
    2. Lighting – 25%
    3. Building Envelope – 10%

If the building systems were placed in service prior to December 31, 2015, different ASHRAE standards or energy reduction thresholds by building system type will apply.

Certification Requirements

To claim the 179D deduction, a certification report is required. The report should include the results of an energy use model using a 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 January 1, 2006, 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.

Take Action

Due to the nearly two-year gap between the expiration of 179D and the recent extension, a substantial backlog of certifications is expected. If you have built, added to, renovated or upgraded at least 50,000 square feet of a 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 use the Contact Us form below.

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