Energy Management Solutions

Tax Deductions

This is what we know so far about the Inflation Reduction Act

IRS Tax Code 179D, under the Energy Policy Act of 2005 (EPAct), allowed for an immediate $1.80 per square foot tax deduction for commercial buildings that achieved a 50% reduction in energy costs related to the building envelope, HVAC systems, lighting, and lighting controls – starting in 2006. Extended many times, the 179D credit became permanent in January 2021.

The Inflation Reduction Act extends and expands the 179D energy tax deduction, starting on January 1, 2023, with new incentive parameters:

Energy cost reductions of 25% will be eligible for the deduction
Taxpayers can claim a deduction of $2.50 per square foot, plus 10¢ per square foot on each percentage point above 25% if a wage requirement is met. The wage requirement states that any laborers, workers, contractors, and subcontractors who worked on the project must have been paid at least the base wages determined by their local labor authorities. In this scenario, deductions cannot exceed $5.00 per square foot.
Partial benefit allowances will be removed but new retrofit plan qualifications will be introduced
Eligibility will be extended to nonprofits, tribal properties, REITs, and other previously ineligible properties
The energy reduction improvements must meet the ASHRAE 90.1 standards (not LEED)

Paragon International, Inc.

1901 N Roselle Road, Suite 711

Schaumburg , Il 60195

INFLATION REDUCTION ACT SIGNED INTO LAW, EXTENDS AND EXPANDS ENERGY-EFFICIENT TAX INCENTIVES

by Capstan Tax Strategies | Sep 7, 2022

Increases the maximum potential deduction to $5.00/SF.

The deduction is determined using an “Applicable Dollar Value” (ADV) multiplication factor. The initial value and eventual cap of the ADV varies depending on whether prevailing wage and apprenticeship requirements* are satisfied.

The new minimum energy reduction threshold that must be met to qualify for the deduction is 25%. The ADV will reward taxpayers who exceed this minimum threshold up to a certain cap.

	Requirements are Satisfied	Requirements are NOT Satisfied
Minimum Initial Value of ADV	$2.50/SF	$.50/SF
For Every 1% Point of Energy Reduction Beyond 25% Threshold, the ADV will Increase By	$.10	$.02
Maximum Value of ADV	$5.00/SF	$1.00/SF

The previous maximum deduction was $1.80/SF, increased to $1.88/SF in 2022 due to inflation. This was derived from a maximum of $.63/SF from each of three focus areas – HVAC, lighting, and building envelope. (If taxpayers could not fully demonstrate savings in all three categories, they could claim a partial deduction. Partial deductions are no longer permissible under the IRA. The legacy 179D interim lighting rule has also been eliminated.)

	Old Law	New Law
Maximum Deduction	Up to $1.80/SF ($1.88 in 2022)	Up to $5.00/SF
Minimum EECB Efficiency Threshold	50% Reduction	25% Reduction
Partial Deductionsmum Value of ADV	Permitted	Not Permitted
Tax Exempt Entities	Not Eligible	Eligible
One Lifetime Deduction	Yes	No. Can be taken every 3 years on an EECB and every 4 years on a building owned by a tax-exempt entity
Alternative Deduction Election for Retrofits	NO	Yes
Most Recent ASHRAE Standard	Two years before start of construction incubation period	Established rules in place four years before property placed-in-service