The Inflation Reduction Act (IRA), passed in 2022, brought substantial improvements to the Section 179D deduction for energy-efficient commercial building upgrades. These enhancements, effective for improvements placed in service after 2022, nearly tripled the deduction, allowing up to $5.36 per square foot under certain circumstances. The IRA also eased qualification criteria, making it more accessible to commercial property owners, tenants, and designers working on specific projects, such as those owned by nonprofit or tribal organizations.
Deduction Overview
For over 15 years, Section 179D has provided a deduction for energy-saving upgrades in commercial buildings. Initially capped at $1.80 per square foot, inflation adjustments in 2020 increased the amount to $1.88. Eligible improvements can include systems like lighting, HVAC, or the building envelope, and the deduction applies to both new constructions and renovations.
To qualify, a project previously needed to achieve a 50% reduction in annual energy and power costs relative to industry standards. However, the IRA lowered this threshold to 25%, allowing more projects to benefit. Additionally, the legislation introduced a sliding scale for deductions based on energy savings, ranging from $0.50 to $1 per square foot, with bonus deductions available for projects meeting prevailing wage and apprenticeship standards.
IRA Enhancements
The IRA made several key changes:
Reduced the energy savings requirement from 50% to 25%.
Replaced partial deductions with a sliding scale ranging from $0.50 to $1 per square foot.
Increased bonus deductions from $2.50 to $5 per square foot for projects meeting wage and apprenticeship requirements.
Allowed the deduction to be claimed on the same building every three years (four in some cases).
Claiming Previous Deductions
If you’ve made qualifying improvements in the past, it may not be too late to claim Sec. 179D deductions. You can either amend your tax return for the year in which the improvements were made or file Form 3115 for catch-up deductions in the current year.
Investing in energy-efficient building improvements can yield significant tax savings in addition to reduced energy costs. Contact Verity CPAs at info@verity.cpa or 808.546.5026 to learn how you can maximize your deductions.
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