Enhanced 179D deduction offers tax savings for energy-efficient real estate


Recent trends and tax law changes are making the 179D Energy Efficient Commercial Building Deduction more attractive and lucrative than ever

In commercial real estate projects, maximizing tax incentives can significantly impact the bottom line. One such incentive gaining popularity is the Internal Revenue Code (IRC) Section 179D deduction, which offers substantial benefits for energy-efficient buildings. Recent trends and tax law changes make this an opportune time to explore the 179D Energy Efficient Commercial Building Deduction.

The 179D deduction can offset the costs associated with implementing energy-efficient technologies in commercial buildings, resulting in substantial savings for real estate developers. Architects and engineers designing buildings for governmental or tax-exempt entities may also be able to qualify.

The following are five reasons why commercial project owners should consider seizing this tax savings opportunity now.

1. Permanent and enhanced 179D deduction

To encourage energy-efficient investments, the federal government permanently codified Section 179D in 2021 as part of the Consolidated Appropriations Act. Then, in 2022, the Inflation Reduction Act enhanced the deduction to allow for more flexibility and more opportunity. The expanded tax benefit includes updates to the value of the 179D deduction, adds new eligible building types, changes the calculation method, and adds a deduction reset. Previously worth less than two dollars per square foot ($1.88/SF in 2022), the deduction is now worth up to $5.00 per square foot for buildings placed in service after December 31, 2022.

The greatest opportunity is for commercial real estate projects whose construction started prior to January 29, 2023, and will be placed into service in 2023 and beyond. These projects will automatically qualify for the enhanced deduction of $2.50-$5.00 per square foot without needing to meet prevailing wage requirements under the Inflation Reduction Act.

2. Rising demand for sustainable buildings

The demand for sustainable buildings is on the rise as businesses recognize the long-term benefits of reducing their environmental footprint. Pursuing the 179D deduction allows commercial project owners to demonstrate their commitment to sustainability while reaping significant financial rewards. By integrating energy-efficient measures into their projects, such as improved HVAC systems, lighting, or building envelope upgrades, owners can attract environmentally conscious tenants and enhance their marketability.

3. Cost savings and return on investment

The implementation of energy-efficient technologies and measures may require a significant upfront investment. However, the 179D deduction offers a tangible return on investment. By claiming the deduction, commercial project owners can reduce their tax liability, generating immediate savings that can be reinvested into their businesses or used to accelerate future projects. This financial incentive not only makes sustainable practices financially viable but also accelerates the adoption of energy-efficient technologies throughout the real estate and construction industry.

4. Compliance with energy codes and standards

Building codes and energy efficiency standards continue to evolve, with many jurisdictions adopting stricter requirements around sustainable development. This could mean that many projects building to their local building code could automatically qualify for the 179D deduction.

Until 2027, Section 179D will continue to reference ASHRAE Standard 90.1-2007. Many jurisdictions are now at least two to three code cycles ahead of this standard. This means 2023-2027 offers a unique opportunity to take advantage of 179D before the program adjusts to a more stringent set of energy efficiency standards.

Pursuing the 179D deduction allows commercial project owners to align their projects with these evolving standards while offsetting the associated costs. By implementing energy-efficient measures beyond what is required, owners can not only achieve compliance but also exceed expectations, gaining a competitive advantage in the market.

5. Positive environmental impact

Embracing sustainable practices goes beyond financial benefits. By pursuing the 179D deduction and investing in energy-efficient improvements, commercial project owners contribute to a greener future. Energy-efficient buildings consume fewer resources, reduce greenhouse gas emissions, and promote environmental stewardship. By being at the forefront of sustainability, real estate developers and other project stakeholders can position themselves as responsible corporate citizens and potentially gain the trust and support of environmentally conscious customers and stakeholders.

The current landscape presents an exceptional opportunity for commercial project owners to capitalize on the 179D deduction. With the codified and enhanced deduction, rising demand for sustainable buildings, cost savings, compliance benefits, and positive environmental impact, pursuing energy-efficient improvements has never been more advantageous. By taking action now, commercial building developers can enjoy financial rewards, attract tenants, stay ahead of evolving standards, and contribute to a more sustainable future.

Contact Kaufman Rossin’s Tax Credits & Incentives team to learn how your commercial real estate projects may be able to qualify for the Section 179D deduction and other tax savings.

Michelle Sadeghy is a Tax Credits & Incentives Manager at Kaufman Rossin, one of the Top 100 CPA and advisory firms in the U.S.

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