What is 179D Tax Deduction?
The 179D commercial buildings energy efficiency tax deduction primarily enables building owners to claim a tax deduction for installing qualifying systems in buildings. Tenants may be eligible if they make construction expenditures. If the system or building is installed on federal, state, or local government property, the 179D tax deduction may be taken by the person primarily responsible for the system’s design. The 179D tax deduction does not apply to other non-tax paying entities, including but not limited to NGOs or churches, unless there exists an energy-as-a-service agreement that is owned by a tax paying company.
Changes to 179D in the new Inflation Reduction Act:
There are now two tiers for the deduction. The first tier has a lower base deduction of $0.50/ sq. ft. if buildings outperform the identified ASHRAE standard by 25%. That can be increased to up to $1/ sq. ft. based on how much the annual energy and power costs are reduced beyond 25%. The second tier has a higher base deduction of $2.50/ sq. ft. and up to $5.00/ sq. ft. if the building also meets the prevailing wage and apprenticeship requirements. This applies to qualifying property placed in service after December 31, 2022.
Here is a quick side-by-side comparison of the new and previous IRC section 179D:
(Source of the table can be found here )
How cove.tool can help with this tax credit?
In the early stage of design, you can use the quick Baseline calculation that runs the ISO 13790 to iteratively test concepts to ensure the design will get the deduction. A design team needs to figure out which iteration would allow you to achieve the percentage reduction for each qualifying category. It is much easier to do this in the early stage of the project when you can run hundreds of models using machine learning to reduce the cost and maximize the energy savings. See here for how to run an optimization in cove.tool.
Also, in later stage of the project, you can use loadmodeling.tool for HVAC sizing and load calculation. This tool uses the EnergyPlus engine which is the industry gold standard and one of the qualifying software programs for calculating commercial building tax deductions.