The 179D tax deduction is calculated based on a commercial building’s square footage and the energy cost savings achieved by improving its envelope, lighting, or HVAC systems. It’s important to note that 179D is not only applicable to building owners. Design firms, such as architects, engineers, and contractors, can also claim this deduction for public buildings such as schools or government offices.
179D Calculation Process
To claim the 179D tax deduction, energy-efficient buildings must be certified as installed as part of a plan designed to reduce the total annual energy and power costs by 50% or more compared to a building meeting the minimum requirements set by ASHRAE Standard 90.1. Here’s how the deduction amount is calculated:
- Calculate the total square footage of the building or the specific area where energy-efficient improvements were made.
- Determine the applicable rate per square foot based on the energy savings achieved.
- Multiply the rate by the square footage to determine the total deduction amount.
Maximum Deduction: Depending on the extent of energy savings achieved, the deduction can be up to $1.88 per square foot (for tax year 2022, adjusted for inflation in subsequent years) of the building.
In 2023, the tax deduction increased from $1.88/sq ft to potentially $5.65 per square foot.
Design elements that might contribute to the building’s overall efficiency include:
- Energy efficient windows
- Better insulation
- Energy-efficient lighting
- Energy saving Heating, Ventilation, and Air Conditioning (HVAC) systems
Partial Deduction: If the building does not meet the total energy savings target, a partial deduction of $0.63 per square foot is available for each system (lighting, HVAC, or building envelope) that meets an energy efficiency threshold.
Getting Started
Claiming the 179D tax deduction can significantly benefit building owners, design firms, and architects by reducing their overall tax liability and helping lower their buildings’ operating costs. Working with tax professionals ensures all requirements are met and the deduction amount is accurately calculated. Our experienced team specializes in determining eligibility and ensuring the successful claiming of the deduction, helping maximize tax savings and streamline the process.
