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How can the energy efficient commercial buildings deduction (Section 179D) help your business with tax savings? Learn all about reducing your tax liability with energy-efficient improvements.
Tax and CreditsInnovation is one of the key ways for businesses to stay relevant and competitive, but one often overlooked area for innovation is energy efficiency. Businesses seeking ways to improve their energy efficiency can benefit from reduced operational costs and higher building occupant satisfaction, all while leaving a strong impression on their customers. Not only do these initiatives benefit the environment, but they can also have an impact on your tax liabilities - by utilizing the Section 179D tax deduction.
In this post, we’ll take a closer look at Section 179D and explore the ways energy-efficient improvements could lead to substantial tax savings for businesses.
Section 179D is the Energy Efficient Commercial Buildings Deduction that allows business owners, designers, and even tenants to claim tax deductions for the costs associated with energy-efficient commercial building property. It was originally introduced in the Energy Policy Act 2005, and was further expanded under the Inflation Reduction Act 2022, which aims to incentivize businesses who invest in energy-efficiency.
There are multiple entities who can qualify for the Section 179D deduction, including:
Tax-paying building owners can benefit from Section 179D for investing in energy-efficient new construction or improvements projects for their properties.
Architects, engineers, contractors, energy service providers, and environmental consultants can also benefit by implementing energy efficient designs for government or tax-exempt building owners.
When tenants pay for and install energy-efficient systems, they can claim the Section 179D deduction.
Real Estate Investment Trusts (REITs) can now also benefit from the 179D deduction as outlined in the Inflation Reduction Act. Unlike other eligible taxpayers, REITs can benefit by reducing their earnings and profits by the Section 179D deduction in the tax year that the energy efficient equipment was installed.
To benefit from the 179D deduction, an eligible party must make energy-efficient installations as a part of the below systems:
To qualify, the building must be a commercial or high-rise residential (4+ stories) building located in the United States. In addition, eligible building’s must be heated and/or cooled.
The deduction rate is determined by the level of energy efficiency achieved; however the deduction amount cannot exceed the total cost of the project. The below table outlines the deduction rate for properties placed in service after 2022:
If a property was placed in service before 2023, there is a maximum deduction of $1.88 per square foot for buildings that achieve 50% energy savings. There is also an option to pursue a partial deduction of $0.63 per square foot by isolating each system to determine its energy efficiency. The target energy savings for a partial deduction is lowered, allowing more opportunity to capture value.
For businesses hoping to innovate through energy-efficient improvements, many benefits are possible, including:
Tax savings through programs like Section 179D are, without a doubt, the biggest benefit of making energy-efficient improvements. Reduced tax liability can be vital for established and growing businesses.
Installing new, energy efficient improvements will lower monthly utility costs for the building. By installing new equipment, this gives the building maintenance team an opportunity to learn about the new equipment and how best to maintain. By providing regular maintenance, these systems will stay efficient and require less repair in the future.
Improved energy efficiency will also serve businesses located in cities and states that introduce emissions and energy efficiency laws. By focusing on energy efficient improvements now, urgent and costly improvements won’t have to be made in the future to avoid penalties or non-compliance with new regulations.
ment - something that can be an important consideration for both customers and investors.
As the U.S. becomes more climate conscious, demonstrating a commitment to sustainability helps contribute to positive brand building, enhancing a company’s reputation among consumers, employees, and other stakeholders. Highlighting energy-efficient practices can attract new customers and enhance brand loyalty among existing customers, helping to contribute to better customer engagement.
Understanding the complexities of tax incentives can be tricky. That’s why using a reliable tax advisor like TaxTaker can benefit your business, and help you understand the various deductions you could be eligible to claim. We take care of your tax issues so that you can focus on giving your all to running your business. Get started today and let us help you discover the potential benefit that can give your business more of what it needs to succeed.
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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