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systems used to power the interior light- increased. The sliding scale starts at Standard 90.1 affirmed by the IRS not
ing systems as well as the rest of the $2.68 per sq. ft., provided the requisite later than two years prior to the date
building would be eligible. 25% energy savings baseline has been when construction of the building began
achieved. The additional deduction for was used as the baseline to determine
Amount of deduction each additional percentage point of energy savings. Under Sec. 179D(c)(2) as
Under prior law, installation of the energy savings above the 25% baseline amended, the new baseline is ASHRAE
energy-efficient property needed to is 11 cents per sq. ft., up to a maximum Standard 90.1-2007 or, if more recent,
reduce the total annual energy and of $5.36 per sq. ft. for energy savings the ASHRAE Standard 90.1 from four
power costs by 50% to be eligible for of 50% or more (see new Sec. 179D(b) years prior to when the building was
the Sec. 179D deduction. The amount (3) and Rev. Proc. 2022-38). Consis- placed in service. The new rules provide
of the deduction was 63 cents per sq. ft. tent with prior law, the amount of the a more definitive frame of reference for
of qualified building property for each deduction is also limited to the amount taxpayers by using the placed-in-service
of three eligible systems installed on spent for the improvements, regardless date of the building rather than the date
the property. These are interior light- of whether the prevailing wage and ap- construction began.
ing, HVAC and hot water, and building prenticeship standards are met. Under prior law, the deduction cap of
envelope systems, as noted above. The To meet the prevailing wage standards $1.88 per sq. ft. (as adjusted for inflation)
amount of the deduction was capped at under new Sec. 179D(b)(4), laborers and also served as a lifetime limitation on
$1.88 per sq. ft. if all three systems were mechanics employed by the taxpayer, or the amount of Sec. 179D deduction that
installed and was limited to the amount any contractor or subcontractor, are to be could be taken with respect to any specif-
spent for the improvements (both square paid wages at rates that meet or exceed ic building. There is no lifetime limitation
footage rates were as adjusted for infla- the prevailing wage for that locality. The under the new rules. Rather, the deduc-
tion for tax years beginning in 2022; see prevailing wage standards are maintained tion allowed in the current year is reduced
Sec. 179D(b)(2) before amendment by by the Department of Labor. Prevailing by the amount of any Sec. 179D deduc-
the Inflation Reduction Act and Rev. Proc. wages are established both by job type tion that was taken for that building in
2021-45). and by locality and will likely be different the immediate three preceding tax years
Under the changes, the amount of for projects that take place in different (four years in the case of buildings owned
the Sec. 179D deduction is based on the parts of the United States. As such, a by a governmental or tribal entity or tax-
amount of annual energy savings and number of questions arise. For example, exempt organization; see Sec. 179D(b)(1)
whether prevailing wage and apprentice- it is unclear whether additional guidance (B)). As a result, periodically undertaking
ship standards have been met. A base in the form of a safe harbor(s) will be is- energy-efficient projects allows for an ad-
deduction with a sliding scale starts at sued to alleviate the difficulty for building ditional benefit under the new rules.
54 cents per sq. ft., provided an energy owners of monitoring the payment of
savings of 25% has been achieved. An wages by contractors and subcontrac- Alternative deduction for retrofits
additional deduction of 2 cents per sq. ft. tors. Additional guidance is necessary to Under prior law, the retrofitting of many
is allowed for each additional percentage define the apprenticeship requirements of older buildings was not eligible for the
point of energy savings achieved above Sec. 179D(b)(5) and is forthcoming. The Sec. 179D deduction because the 50%
the 25% baseline, up to a maximum of rules will be similar to the rules in Sec. energy savings threshold could not be
$1.07 per sq. ft. for energy savings of 45(b)(8), which largely require that a cer- met. The new law provides two amend-
50% or more (see Sec. 179D(b)(2) after tain percentage of hours be performed by ments that make it easier for these
amendment by the Inflation Reduction qualified apprentices (i.e., 12.5% of hours retrofits to be eligible for a Sec. 179D de-
Act and Rev. Proc. 2022-38). By reduc- in 2023 and 15% in 2024 and after). duction. First, the sliding scale discussed
ing the baseline annual energy savings The new rules also modified the above under Sec. 179D(b)(2) provides
percentage requirements from 50% to standard used to measure energy savings. a benefit for older properties that could
25% and adding a sliding scale, the new ASHRAE Standard 90.1 is now used to only achieve the lower threshold of 25%
rules expand the deduction opportunity determine if there has been a reduction in or more in energy savings.
to include older properties, for which total annual energy and power costs. This Second, Sec. 179D(f) adds a new
owners previously had difficulty achiev- standard provides the minimum require- alternative deduction for retrofits that is
ing the 50% energy savings threshold. ments for energy-efficient design of most elective on a building-by-building basis.
If the prevailing wage and appren- buildings and, notably, does not include Under this alternative, the level of energy
ticeship standards are met, the amounts low-rise residential buildings. Under usage, rather than the level of energy
described previously are significantly prior law, the most recent ASHRAE cost, is used to determine the extent the

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