Energy Efficient Commercial Buildings Deduction Made Permanent

02/26/2021

By Stan Babicz Principal CLA T. 414.721.7631 Email

Key insights

  • The Energy Efficient Commercial Buildings Deduction (Section 179D) was made a permanent component of the Internal Revenue Code by the Consolidated Appropriations Act, 2021.
  • Section 179D deductions are now indexed for inflation for taxable years beginning after 2020.
  • Baseline standards were raised to the most recently published ASHRAE standards.

If you own a recently constructed or renovated energy efficient building — or if you’ve designed an energy efficient building owned by a government entity — the latest round of COVID-19 relief may help you maximize your tax benefits. Understand how recent changes to the Internal Revenue Code may impact you.

An overview of Section 179D

The Energy Efficient Commercial Buildings Deduction (Section 179D of the Internal Revenue Code) applies to energy efficiency improvements to a commercial building’s:

  • Interior lighting systems
  • Building envelope construction
  • Heating, cooling, ventilation, and hot water systems that reduce the building’s total energy and power cost by 50% or more in comparison to a building meeting the minimum requirements set by standards established by the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE)

The deduction equals the cost of the energy efficient commercial building property — not to exceed the equivalent of $1.80 per square foot — and is available to owners of new or improved existing buildings.

If the property is owned by a federal, state, or local government, the deduction is also available to the person who designed the energy efficient property (in lieu of the owner). As such, the deduction may be available to the designer of record for buildings like schools, municipal buildings, prisons, parking garages, and other government-owned properties.

Partial deductions, up to $0.60 per square foot, are available where the lighting, building envelope, or heating and cooling systems individually qualify by meeting certain target levels.

Changes as a result of the Consolidated Appropriations Act, 2021

Section 179D previously applied to structures placed in service after 2005 and before January 1, 2021. However, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 — part of the Consolidated Appropriations Act, 2021 (CAA 2021) that was signed into law December 27, 2020 — made the Energy Efficient Commercial Buildings Deduction permanent and materially altered certain Section 179D provisions.

The CAA 2021 inserted a provision that provides an inflation adjustment for this deduction for years after 2020. This adjustment uses the C-CPI-U (Chained Consumer Price Index for All Urban Consumers), with the base year of 2019. Adjustments of the $0.60 or $1.80 per square foot deduction are rounded to the nearest cent.

New energy efficiency standards

The legislation also updated the baseline standards in an effort to encourage building owners and designers to enhance the energy efficiency of buildings. Previously, ASHRAE Standard 90.1-2007 was used as the benchmark to test the energy efficiency of the buildings or the sub-components of the building. Now, Section 179D(c) is amended to use ASHRAE “Reference Standard 90.1,” which is defined as the most recent Standard 90.1 published by ASHRAE and the Illuminating Engineering Society of North America. This standard must have been affirmed by the Secretary of the Treasury (after consultation with the Secretary of Energy) no later than two years before the date that construction of such property begins.

This provision permits the ASHRAE standards to update without requiring further legislation. However, the aforementioned two-year provision can help to avoid unexpected changes during the construction, design, and planning process, as the reference standard cannot be more recent than the standard from two years prior to the beginning of construction of the subject building.