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Real Estate

Recent changes to the
Sec. 179D energy-efficient
commercial buildings
deduction

The energy efficient commercial
buildings deduction under Sec. 179D
provides taxpayers with an incentive
to make certain commercial building
property more energy efficient. The Sec.
179D deduction has been in effect since
Jan. 1, 2006, and was made permanent
as part of the Consolidated Appropria-
tions Act of 2021, P.L. 116-260, enacted Taxpayers that design buildings owned 179D deduction amount in the year the
in December 2020. A new and en- by governmental entities could also energy-efficient components are placed
hanced version of Sec. 179D was signed benefit because those governmental in service (or the year of final certifica-
into law on Aug. 16, 2022, as part of entities were able to allocate the Sec. tion for retrofit property). In contrast,
the Inflation Reduction Act of 2022, 179D deduction to the person “primar- under prior law, the Sec. 179D deduc-
P.L. 117-169. The new rules under Sec. ily responsible” for the design. Thus, tion reduced REIT E&P ratably over a
179D apply for tax years beginning after architects and engineering firms could period of five tax years.
Dec. 31, 2022, and to qualifying prop- benefit from this provision. Taxpayers
erty placed in service after that date. that were both the designer and the Energy-efficient commercial
These newly enacted changes to Sec. builder of commercial building property building property
179D provide additional opportuni- were also eligible for the deduction. To be eligible, energy-efficient property
ties for taxpayers, including as much as Sec. 179D(d)(3) significantly ex- must be installed on certain types of
$5.36 per square foot (sq. ft.) in imme- pands the list of organizations that may buildings, as described in Sec. 179D(c)(1).
diate deductions to encourage the con- allocate their Sec. 179D deduction. The These are largely commercial buildings
struction of energy-efficient commercial new list includes: and multifamily buildings that are at
buildings and multifamily buildings that ■ Governmental entities; least four stories tall. Eligible property
are at least four stories tall. In addition, ■ Tax-exempt organizations; and includes schools, churches, hospitals,
certain provisions under the revised Sec. ■ Indian tribal governments and and other property within the scope
179D expand the opportunity for en- Alaska Native corporations. of Standard 90.1 published by the
ergy efficient retrofits of older buildings Sec. 179(d)(3) allows tax-exempt American Society of Heating, Refriger-
to become eligible for the deduction, by organizations to negotiate the alloca- ating, and Air Conditioning Engineers
reducing applicable requirements. Tax- tion of the deduction to the designer (ASHRAE) and the Illuminating Engi-
exempt organizations are also provided of the property, which may result in a neering Society of North America. The
an incentive to make their facilities sizable amount of savings in the devel- buildings must also be located in the
more energy efficient under the new opment of new projects. Groups with a United States. Further, such property
provisions. However, taxpayers must also substantial amount of real estate, such must be installed as part of:
■
PHOTO BY KENWIEDEMANN/GETTY IMAGES to meet certain prevailing wage and particularly beneficial. ■ The heating, cooling, ventilation
as universities, hospitals, and religious
be aware of added complexity under the
The interior lighting systems (exte-
rior lighting does not qualify);
organizations, may find this opportunity
new rules, including the requirement
Further, Sec. 312(k)(3)(B) was
apprenticeship standards to achieve the
(HVAC), and hot water systems; or
■
The building envelope (e.g., windows
maximum deduction.
amended to make it easier for real estate
and roofing).
investment trusts (REITs) and their
Who is eligible?
shareholders to benefit from the Sec.
These provisions are consistent with
existing law, though taxpayers would
Under prior law, taxpayers that owned
179D deduction. Under new Sec. 312(k)
(3)(B)(ii), REITs are allowed to reduce
benefit from additional guidance. For
commercial buildings could be en-
titled to a deduction under Sec. 179D.
February 2023 17
www.thetaxadviser.com earnings and profits (E&P) by the Sec. example, it is not clear whether solar