The Ultimate Guide to HVAC, Hot Water System Upgrades, & the 179D Deduction

The Ultimate Guide to HVAC, Hot Water System Upgrades, & the 179D Deduction

Learn how upgrading HVAC and hot water systems can save money and help the environment through the 179D tax deduction.

By Abby Massey ・ 8 min read
Guides and Tips

Picture this: every time a building is designed or upgraded to be energy-efficient, it’s like giving the Earth a little hug. The 179D tax deduction is a way to encourage and reward these Earth-friendly choices, helping businesses save money while they do good for the planet. The 179D incentive started back in 2005 and got a big boost in 2022, making it even better for those looking to make their buildings greener through HVAC and Hot Water, Interior Lighting, and Building Envelope improvements. 

It’s important to understand what improvements are the best fit for the 179D program. In this article we will take a deeper look into the HVAC & Hot Water component of the 179D incentive. Before we dive into the specifics, let’s quickly recap what the 179D tax deduction is all about.

Who Can Benefit from 179D?

Lots of different folks can benefit from 179D, not just the people who own the buildings. Here’s who’s qualifies:

  • Building Owners: If you own a building and decide to make it more energy-efficient, you could see some nice tax savings.
  • Designers: Are you an architect, engineer, or contractor who puts their creative mind to work in designing energy-efficient buildings? This could mean extra savings for you if you work on projects for government or tax-exempt building owners.
  • Tenants: If you're renting a space and decide to upgrade it with energy-saving features, you might also qualify for this deduction.
  • REITs: Real Estate Investment Trusts, those big companies that own lots of buildings, can also benefit. The new rules from 2022 help them save on taxes when they make their buildings more energy-efficient.

What Building Upgrades Qualify?

To snag this reward, the upgrades need to focus on three main areas of a building:

  • HVAC and Hot Water: This is all about controlling the building's temperature and domestic hot water in a way that uses less energy.
  • Interior Lighting: Installing lighting and controls that perform well without wasting electricity.
  • Building Envelope: This refers to the outer shell of the building (think walls, windows, and the roof) that helps keep the indoor temperature steady without overusing heating or air conditioning systems.

The building must be a commercial space or a high-rise residential building, located in the U.S., and equipped with systems for heating and/or cooling.

Why Focus on HVAC and Hot Water Systems?

When it comes to making buildings energy-efficient, every little bit helps. But why put the spotlight on HVAC (heating, ventilation, and air conditioning) and hot water systems? Simply put, these systems are huge contributors to a building's energy use. Let’s break it down:

Think of HVAC systems as the building's climate control center, constantly at work to ensure everyone inside stays comfortable through scorching summers and biting winters. This constant regulation of indoor temperature is no small feat, particularly in larger buildings or those in regions with significant temperature variations. The energy required to maintain this comfort can be substantial.

  • The Scale of Consumption: HVAC systems can account for up to half of a building's total energy use. In regions with extreme weather conditions, this figure can skew even higher, making HVAC systems the top priority for energy reduction efforts.
  • The Impact of Upgrades: Modern, energy-efficient HVAC systems are designed to provide the same level of comfort—or even better—with significantly less energy. Technologies like variable speed drives, smart thermostats, and advanced heat recovery systems can adjust energy use in real-time, tailoring heating and cooling to the precise needs of the building, thus avoiding wasteful energy consumption.

The Importance of Hot Water Systems

Domestic hot water is another non-negotiable feature in buildings, vital for hygiene, comfort, and various operational needs. However, the traditional means of providing this hot water—through tank-based or even tankless systems—can be incredibly energy-intensive.

  • The Constant Need: Unlike HVAC systems, which might see seasonal breaks, the demand for hot water is year-round and often constant throughout the day. This consistent demand means that hot water systems contribute to a building's overall energy footprint.
  • Efficiency Opportunities: Upgrading to more efficient hot water systems, such as those using heat pump technology or solar water heating, can dramatically reduce energy use. These systems utilize renewable energy or ambient air, drastically cutting down the electricity or gas needed to heat water. Additionally, better insulation of hot water storage tanks and pipes reduces heat loss, ensuring that less energy is needed to maintain water at the desired temperature.

Making the Most of the 179D Deduction

By focusing upgrades on HVAC and hot water systems, buildings not only become more energy-efficient but also stand to gain the most from the 179D tax deduction. This is because the potential for energy savings in these areas are huge, making them prime targets for upgrades that qualify for the deduction.

Investing in better HVAC and hot water systems is a smart move for the future. It’s about saving money, sure, but it’s also about investing in a sustainable future for everyone. The 179D tax deduction recognizes this by offering a financial incentive to make these important upgrades. It’s a way to encourage building owners, tenants, and designers to make choices that are good for their wallets and good for the world.

In a nutshell, focusing on HVAC and hot water systems is a direct route to making buildings more energy-efficient, more comfortable, and less costly to run—all while contributing to a healthier planet. It’s a clear example of how smart, forward-thinking decisions can have a big impact, one building at a time.

An Expert Guide To: The Section 179D Tax Deduction

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The Monetary Benefits of Upgrading HVAC and Hot Water Systems

Upgrading your building's HVAC and hot water systems to be more energy-efficient isn't just a boom for the environment—it's also a smart financial move.

Imagine you have a piggy bank that gets a deposit every time you save energy in your building. Let’s break it down to understand how much you can save in taxes, just by making your building more energy-efficient.

The Basics of Calculating Your 179D Deduction

Think of your building as a giant box. The size of this box (in square feet) helps determine how much you can save. Bigger box, bigger savings potential. 

Now, if your building uses less energy for heating and cooling, you increase your tax deduction. How much money depends on how much you reduce your energy costs when compared to a similar building that only meets the minimum building code requirements.

The Simple Math Behind It

  • If you made improvements to your heating and hot water systems prior to 2023 - it’s not too late! You can still claim your 179D deduction. In this scenario, a 15% increase in energy savings will get you $0.60 for every square foot of your building.
  • If you made improvements in 2023 or are planning future improvements, a 25% savings could result in up to $2.50 for every square foot of your building.
  • If you manage to make the whole building 50% more energy-efficient, you will maximize your benefit for every square foot. For projects before 2023, the savings jumps to $1.80 for every square foot. For projects in 2023 and beyond, the maximum is $5.00 for every square foot.
  • The Cap: No matter how much you spend to make these improvements, your tax deduction can never exceed the cost of your project. It's like a “spend money to save money” deal, but you won't save more in taxes than what you've actually spent on the upgrades.

What Changed with the Inflation Reduction Act?

  • Bigger Savings Opportunity: After the Inflation Reduction Act, the maximum you can save went up to $5.00 per square foot!
  • Increased Opportunity for Savings: The initial program would only afford you a partial deduction at 15% savings or a full deduction at 50% savings, meaning a 47% savings would get you the same benefit as 15% savings. Now, the deduction amount increases for every percentage point above the minimum 25% threshold up to the 50% maximum.
  • Multiple 179D Deductions: Prior to the IRA, you were only eligible to claim the maximum $1.80 per square foot deduction once on a property. Once it was claimed, it was gone for good. Now, taxpayers can make continuous improvements to their HVAC & Hot Water system and still claim the 179D benefit.

The journey toward upgrading HVAC and hot water systems for enhanced energy efficiency is not just an environmental imperative; it's a route to substantial financial gains through energy savings and the 179D tax deduction. 

From conducting detailed energy audits to implementing state-of-the-art energy-efficient technologies, each step on this path can significantly reduce operational costs and boost your building's sustainability profile.

As specialists in securing tax incentives for businesses, Taxtaker streamlines the process of claiming benefits like the 179D deduction, ensuring you fully leverage these opportunities without the hassle. Our expertise simplifies the journey, helping you make informed decisions that align with the latest in tax incentives and energy efficiency standards.

Begin your journey to a more sustainable, profitable future with the right expertise by your side!

An Expert Guide To: The Section 179D Tax Deduction

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About the author

Abby Massey
VP of Energy Incentives

Abby Massey is an expert in applying tax incentives for clean energy initiatives. With a B.S. in Civil Engineering from Purdue University and licenses in 47 states plus the District of Columbia, Abby offers significant expertise to her role at TaxTaker as the Vice President of Energy Incentives. Her experience includes certifying over 1,400 179D deductions, achieving more than $100 million in savings for clients. As a LEED Accredited Professional, Abby is dedicated to sustainable building practices. In her role at TaxTaker, she focuses on optimizing energy incentives for clients by leveraging her in-depth understanding of the 179D program, aiming to improve business sustainability and efficiency.

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