For 2023, 179D Nearly Triples Tax Incentives, Lowers the Thresholds, and Expands Eligibility to Tax Exempt Organizations.
The newly updated 179D Energy Efficient Commercial Building Deduction in the recently-passed Inflation Reduction Act (IRA) has some of the most significant updates to incentives for property owners and designers to improve the efficiency of their buildings. It encourages sustainable building projects with higher incentives more widely available to building owners and project design consultants, building on the original Energy Policy Act (EPAct) of 2005 Section 179D, which has had smaller incremental adjustments in previous years.
Bigger Incentive with Lower Energy Savings Threshold
The new Act effective January 1, 2023, raises the deduction value from the current maximum of $1.88 per square foot up to a maximum of $5.00 per square foot, with new criteria for meeting prevailing wage and apprenticeship requirements (and much lower incentives if these are not met). In addition, the Act lowered the minimum required savings in total annual energy and power cost from a 50% reduction to 25% reduction, compared to ASHRAE Reference Standard 90.1-2007 (until updated); it also includes an alternate retrofit design approach using Energy Use Intensity (EUI) instead of savings percentage. For those projects meeting the 25% savings threshold and the prevailing wage and apprenticeship requirements, the Act offers $2.50/sf, plus incremental $.10/sf for each percentage of savings up to 50% at $5.00/sf. These changes also shift the focus to a whole-building energy impact vs. a per-system approach, where lighting, HVAC, or envelope work would each get a ~$.60/sf allocation.
More Buildings & Organizations Qualify: Benefits for Tax Exempt
Previously, only commercial building owners and designers of buildings owned by Government entities could qualify for the 179D incentives. But now buildings and energy-efficient retrofit systems designed for tax-exempt organizations qualify, including:
Charitable organizations
Religious institutions
Private schools or colleges
Private hospitals
Museums
Tribal governments
Non-for-profit organizations
Engineers, architects, and energy-efficiency design/build contractors can now claim the 179D deduction for projects done with tax-exempt organizations who assign the designation.
What Systems to Update in a Retrofit:
These revised incentives are available to both newly constructed and retrofitted buildings. Some of the most impactful equipment and system improvements for reducing energy use in existing buildings include:
Interior lighting
At Minify Energy we’ve developed and implemented plans for clients to upgrade their lighting to LEDs and they’ve realized up to 60-80% energy savings year-over-year for lighting consumption and demand. Not only is an LED lighting upgrade a major opportunity to help reach the new 25% energy-reduction requirement and receive the 179D incentive, but these updates also greatly reduce utility and operating expenses, while enhancing the building environment and occupant experience with improved lighting quality.
HVAC & Hot Water Systems
For HVAC systems, qualifying energy-efficiency projects can include installing newer high-efficiency equipment (e.g. heat pumps, VRF, etc) and/or the addition of smart HVAC automation controls to existing equipment, such as chillers, boilers, air handling units (AHUs), rooftop units (RTUs), energy recovery ventilators (ERVs), Fan Coils, VAVs, etc. When HVAC systems are inefficient or nearing end-of-life, we design and recommend the most appropriate “deep green” turnkey solutions, “right-sized” for the demand of the building.
And, the addition of variable frequency drives (VFDs), high-efficiency motors, and power factor correction solutions can also contribute to the savings and meeting the threshold for 179D.
The energy savings are typically very dramatic, often reducing HVAC - which is typically a large percentage of building load - by 20-30% or more. So, not only do these changes help the building qualify for the 179D incentive, they result in updates that are a valuable long-term investment in reduced utility costs, lower operations and maintenance, improved environment and air quality, and a lowered carbon footprint. Minify Energy has worked to optimize the HVAC efficiency of a variety of these systems.
Building Envelope
While LED Lighting and HVAC/Controls tend to offer the greatest retrofit ROI, we also help identify and prioritize opportunities to improve the efficiency of a building’s envelope by increasing its R value. Insulation, roofs, walls, doors, windows, and window treatments all affect energy efficiency for heating and cooling, as well as occupant comfort and productivity. A higher R value will help a building qualify for the 179D incentive and improve building management financials.
Bottom Line: Energy Efficiency Offers Impressive Financials with a Boost from 179D
179D Tax Deductions are one of several beneficial incentives for improving energy efficiency in commercial buildings. When combined with depreciation, grants and rebates, the net cost to building owners is significantly reduced (typically 20-50%), speeding the ROI payback timeframe based on simple energy savings alone. The added value beyond energy savings includes reduced operations and maintenance costs, plus enhanced property value and tenant attraction and retention. In addition, special low-interest financing can help to cover the costs, often with a cashflow-neutral model where your payment equals what you would have been paying the utilities.
Let’s Minify Energy at Your Building!
(Thank you to ICS Tax, LLC for their insights on the IRA and 179D)