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 Appropriations Act of 2021, P.L. 116-260, enacted in December 2020. A new and enhanced version of Sec. 179D was signed into law on Aug. 16, 2022, as part of the Inflation Reduction Act of 2022, P.L. 117-169. The new rules under Sec. 179D apply for tax years beginning after Dec. 31, 2022, and to qualifying property placed in service after that date.

These newly enacted changes to Sec. 179D provide additional opportunities for taxpayers, including as much as $5.36 per square foot (sq. ft.) in immediate deductions to encourage the construction of energy-efficient commercial buildings and multifamily buildings that are at least four stories tall. In addition, certain provisions under the revised Sec. 179D expand the opportunity for energy efficient retrofits of older buildings to become eligible for the deduction, by reducing applicable requirements. Taxexempt organizations are also provided an incentive to make their facilities more energy efficient under the new provisions. However, taxpayers must also be aware of added complexity under the new rules, including the requirement to meet certain prevailing wage and apprenticeship standards to achieve the maximum deduction.

Who is eligible?

Under prior law, taxpayers that owned commercial buildings could be entitled to a deduction under Sec. 179D. Taxpayers that design buildings owned by governmental entities could also benefit because those governmental entities were able to allocate the Sec. 179D deduction to the person “primarily responsible” for the design. Thus, architects and engineering firms could benefit from this provision. Taxpayers that were both the designer and the builder of commercial building property were also eligible for the deduction. Sec. 179D(d)(3) significantly expands the list of organizations that may allocate their Sec. 179D deduction. The new list includes:

• Governmental entities;
• Tax-exempt organizations; and
• Indian tribal governments and Alaska Native corporations.

Sec. 179(d)(3) allows tax-exempt organizations to negotiate the allocation of the deduction to the designer of the property, which may result in a sizable amount of savings in the development of new projects. Groups with a substantial amount of real estate, such as universities, hospitals, and religious organizations, may find this opportunity particularly beneficial.

Further, Sec. 312(k)(3)(B) was amended to make it easier for real estate investment trusts (REITs) and their shareholders to benefit from the Sec. 179D deduction. Under new Sec. 312(k) (3)(B)(ii), REITs are allowed to reduce earnings and profits (E&P) by the Sec. 179D deduction amount in the year the energy-efficient components are placed in service (or the year of final certification for retrofit property). In contrast, under prior law, the Sec. 179D deduction reduced REIT E&P ratably over a period of five tax years.