What are Section 179D Tax Deductions?
IRS Code Sec. 179D allows a tax deduction for energy efficient property placed in service in commercial building property from January 1, 2006, through December 31, 2013. Identification of energy efficient commercial building property can be combined with a standard cost segregation study to provide greater tax benefits than a stand alone cost segregation study would.
How does it work?
The deduction total is limited by the overall square footage of a qualifying building. The maximum deduction is $1.80 per square foot. However if the building’s energy-reducing investments do not qualify for the full $1.80 per square foot, the investments may still qualify for some deduction for investment in any of the following three major sub-systems:
- Lighting
- Heating, ventilation and air conditioning (HVAC)
- Building envelope.
Each component system can qualify for up to 60 cents per square foot. Partially qualifying lighting, HVAC and building envelope property is defined in IRS Notice 2006-52, which states that a qualifying system must reduce the total energy usage costs by at least 16 2/3-percent as compared to a reference building that meets the minimum requirements of Standard 90.1-2001. Notice 2006-52 also states that certification the qualified systems meet 179D requirements must be supplied by an engineer or contractor that is properly licensed as a professional engineer or contractor in the building’s location jurisdiction and that only qualified computer software is permissible to calculate and document the improved energy performance.
What types of projects and properties qualify?
Interestingly, during the first three years that this energy tax credit was available, there were many qualifying lighting projects, but only a handful of qualifying HVAC and building envelope projects. This was due to qualifying lighting products being market ready and the lighting industry being very familiar with the process of obtaining tax deductions for these qualified expenditures. Additionally, lighting replacement projects are generally straight forward and federal mandates prohibiting further manufacture or import of metal halide or T-12 fluorescent lighting fixtures forced the use of qualifying energy efficient lighting products, such as :
- Compact fluorescents (CFLs)
- Light emitting diodes (LEDs)
- Low wattage incandescents
- Occupancy sensors to turn off and on lights
- Day lighting sensors that use natural light to reduce or shut off
lights during daylight hours in areas with large window spaces.
Regarding HVAC, by far the largest energy using system in commercial buildings, there are currently several categories of projects that generate the 179D tax deductions:
- Highly efficient right-sized systems: these are central HVAC
systems where the air handling units (AHUs) or chillers are high efficiency
units, often using variable frequency drives (VFDs) to minimize energy use on
major motors. - Decentralized, well controlled systems: these use smaller systems
to handle normal day-to-day energy use instead of having one large central
system. Occupancy sensors are used to turn off and on components only as
needed, because the best possible energy savings stems from turning off units
when they are not needed. - Demand control ventilation: these use human occupancy (CO2)
sensors to control the amount of outside air required in specific spaces and automatically
adjust system dampers accordingly. - Thermal storage, geothermal heat pumps and heat recovery systems:
these are more complex systems that take advantage of off-peak energy usage
hours, groundwater resources, and/or waste heat recapture to achieve increased
energy performance.
The building envelope is considered to include every item on the building’s perimeter that touches the outside world, including the roof, walls, insulation, doors, windows and foundations. Since the building envelope does not actually “use” energy, the tax deduction requires the envelope to reduce the energy used by existing lighting and HVAC systems. Examples of projects that may achieve this effect are:
- Extremely well insulated, prefabricated building envelope items
(such as roofs and walls) - Energy efficient tinted windows and strategically placed windows
and skylights that allow reduced lighting energy consumption
Commercial building types that are most commonly capturing all or some portion of 179D tax credits include:
- Apartment Houses/Complexes
- Car Dealerships
- Hotels and Motels
- Parking Garages
- Restaurants
- Retail
- Supermarkets
- Warehouses and Distribution Centers
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