How 179D Can Benefit Your Real Estate Business

In an era where "going green" is not just a badge of honor but a business imperative, there's a golden nugget hidden within the tax code that savvy real estate businesses are leveraging to significant effect: Section 179D. This isn't merely a policy footnote—it's a financial accelerator for those committed to energy efficiency in their properties.

Think of Section 179D as the IRS giving a nod to the builders, innovators, and visionaries in the real estate sector who are pushing the envelope on energy efficiency. Born out of the Energy Policy Act of 2005, this provision is designed to reward commercial property owners and designers for investments that reduce energy consumption. The essence? If you upgrade your building to consume less energy, the government will offer you a tax deduction—consider it a pat on the back for helping the planet and promoting sustainable development.

The History of 179D

To fully grasp the value and potential of the 179D deduction, it's helpful to dive into a bit of its history. Originating from the Energy Policy Act of 2005, the 179D deduction was created as an incentive to encourage the construction and renovation of buildings that are more energy-efficient. This initiative was a clear signal of the U.S. government's commitment to promoting environmental sustainability and energy conservation within the commercial real estate sector. 

Fast forward to the recent Inflation Reduction Act of 2022, and you'll find that the 179D deduction has not just been extended; it's been supercharged. Now, building owners and designers can qualify for up to $5 per square foot for implementing energy-efficient improvements, significantly upping the ante for investments in green building practices. This evolution underscores a growing emphasis on aligning economic incentives with the goal of reducing energy consumption and fostering a more sustainable future.

Who Can Benefit from 179D?

To get the 179D Tax Deduction for making your building energy-efficient, it has to meet certain green standards. If you're working on making your building save more energy (we call this Energy Efficient Commercial Building Property, or EECBP for short), it needs to be in the U.S. and meet minimum requirements as identified by ASHRAE. 

This means your building's interior lighting, heating, cooling, building envelope, and even the hot water system should use less energy.

But there's more – you need to meet specific guidelines to show your new construction or renovation upgrades really do save energy. You must prove that your building is at least 25% more energy efficient when compared to a similar building designed to the minimum requirements. Plus, you have to get a third-party engineer to certify the results before claiming the deduction.

Since January 2023, the rules for getting this tax break have been updated. Designers can now claim the 179D deduction when designing energy-efficient systems for tax-exempt organizations like religious groups, private schools, and hospitals. This is all in addition to the original program rules that allowed designers to claim the benefit when designing for government organizations (local, state, and federal).

Who Actually Gets the Benefits?

Who can really take advantage of the 179D tax deduction? It's not just for one type of person or company. Whether you're designing a building, constructing it, or own it, you might be able to get some financial benefits for making it energy-efficient. Here's a look at who's eligible:

• Architects and Engineers: If you design buildings or the HVAC and hot water, interior lighting, or building envelope systems within a building, you might be eligible for this deduction if your client base are government or tax-exempt building owners.
• Construction Contractors: If your role on a project includes a design element, you may also be able to claim the 179D benefit from government and tax-exempt entities.
• Owners and Lessees of Buildings: If you own a building and make it more energy-efficient, you qualify. Lessees who invest in energy efficiency can also sometimes claim the 179D deduction
• REITs: REITs can now claim the 179D tax deduction as a result of changes implemented in the Inflation Reduction Act.

How Much Money Are We Talking About?

The 179D tax deduction can really vary in how much it puts back in your pocket, and it all hinges on three main topics: paying your workers the right wages, participating in apprenticeship programs, and how effective your energy-saving efforts are. Here’s a breakdown to make it super clear:

• Prevailing Wage & Apprenticeship Requirements: To further enhance the IRA, many tax incentives are eligible for higher rates if you're paying your workers what's typically expected in your area and supporting the trades through apprenticeship programs. For implementing these two items into your project, you could be eligible for a 5 times multiplier on your 179D deduction. That’s right, a huge increase in value, up to $5 per square foot of your building.

• Energy Savings: As of 2023, the minimum threshold of energy savings required to qualify for a 179D deduction is 25%. Anything above 25% means more dollars in your pocket. If you achieve 50% or more? Then you are eligible to claim the maximum benefit. Now, if you aren’t able to meet the above requirements, you’ll still get some money back, but it won’t be the full $5 per square foot. Instead, your project will be eligible for up to $1 per square foot of your building to achieve 50% energy savings.

The idea is to encourage you to not only make your buildings greener but also to support fair wages and proper training for the building trades industry. The better you do on both fronts, the more you save. It's designed to reward you for doing good by your employees, contractors, and the environment.

Let's Make It Simple

Even though all this talk about tax deductions and energy savings might seem complicated, it's really about making our buildings better for the environment and getting rewarded for it. Working with experts who know all about these rules can help make sure you get the most money back for your green building projects.

The 179D tax deduction is a way for the government to say "thank you" to those who are helping to make our buildings more energy-efficient. Whether you're updating an old building or creating a new one, these benefits can help cover some of the costs. Plus, you're doing something good for our planet, which is pretty awesome.

Navigating the complexities of this tax incentive can significantly benefit your business, but understanding the specifics can be challenging. That's where TaxTaker comes in. As experts in energy-efficient tax incentives, we're here to guide you through every step, ensuring you maximize your savings and contribute to a more sustainable future.

Learn more here.