Imran Syed, PE, LEED AP, Senior Manager, Cost Segregation & EPAct §179D

Over the past decade, commercial building owners and designers of government-owned buildings have significantly benefitted from the §179D Energy-Efficient Commercial Buildings deduction. Installing energy-efficient lighting, HVAC, and building envelope components, not only can reduce a building’s carbon footprint or lower its utility bills, but eligible taxpayers may obtain a deduction ranging from $0.30-$1.80 per square foot. Unfortunately, the §179D deduction expired on December 31, 2016. This deduction has always had bipartisan support and been retroactively extended multiple times in the past. There are currently several efforts under way to extend this valuable tax benefit.

Currently, a bill named “Clean Energy for America Act” was introduced May 4, 2017, by Senator Ron Wyden and 21 other senators. The bill includes extension and modification to §179D as part of 44 existing energy tax incentives.

Below is a summary of the proposed changes to §179D:

  • Section 179D will be limited to new commercial buildings and the tax benefits will be increased:
    • The applicable dollar value will be an amount equal to $1 and will increase to a maximum of $4.75 based on the reduction in energy consumption.
    • The baseline standard will be ASHRAE 90.1-2016 in lieu of ASHRAE 90.1-2007.
    • The deduction increases by $0.25 for every five percentage points by which the efficiency ratio is greater than 25 percent (annual energy consumption).

Example: If a building qualifies for 50 percent reduction in energy consumption, the total deduction will be ($1+$1.25 = $2.25/SF). Unlike the existing regulations, the savings is based on energy consumption rather than energy costs.

  • Section 179F has been introduced for energy-efficient improvements to existing commercial buildings.
    • The energy savings is measured by comparing the projected annual energy consumption of the renovated building to the annual energy consumption of the existing building prior to the energy improvements being placed in service.
    • The applicable dollar value of the tax deduction will be an amount equal to $1.25 and will increase to a maximum of $9.25 based on the reduction in energy consumption. The deduction increases by $0.50 for every five percentage points by which the efficiency ratio is greater than 20 percent.

Example: If a building qualifies for 50 percent reduction in energy consumption compared to the existing building, the total deduction will be ($1.25+$3 = $4.25/SF).

  • In addition to government entities, 501(c) nonprofit organizations can allocate the deduction to designers.
  • The bill will renew 179D and 179F through 2018.

In addition, there were three house resolutions introduced during the previous session of Congress (114th) that were not enacted.

  • HR 6360 and HR 6361 were introduced by Rep. Alan Grayson on November 17, 2016. This bill would extend §179D through 2017 and 2018, respectively.
  • HR 6376 was introduced by Rep. Dave Reichert on November 17, 2016. This bill expanded §179D by :
    • Allowing 501(c)(3) nonprofits to allocate the deduction to designers
    • Allowing partnerships and S corps to receive the deduction allocated at the partner or shareholder level
    • Exempting qualified low-income buildings from the requirement to reduce the basis of the property by the amount of the deduction.

We believe that lawmakers will review the §179D deduction and include it in some form as part of new tax reform proposals. For more information on the status of § 179D or to inquire about a study for a prior tax year, please feel free to reach out to one of our business development directors.

Imran Syed, PE, LEED AP, Manager, Cost Segregation & EPAct §179D

Imran Syed, PE, LEED AP, Manager, Cost Segregation & EPAct §179D

Overview

On Friday, December 18, 2015, President Obama signed in to law the Protecting Americans from Tax Hikes (“PATH”) Act of 2015, Public Law No. 114-113. The PATH Act retroactively extended the §179D Energy Efficient Commercial Buildings deduction through the end of 2016. The PATH Act also modified the §179D deduction beginning in 2016. Popularly known as the EPAct §179D deduction, this deduction helps commercial building owners and designers of government-owned properties to build energy-efficient properties.

This deduction applies to building owners who have installed or retrofitted a property with energy-efficient lighting, HVAC and building envelope systems. The designers of government-owned buildings such as public schools, universities, federal and state offices, public libraries and government dormitories (four stories or higher) may also receive the deduction.

To receive the EPAct §179D deduction of up to $1.80 per square foot, a taxpayer must install building systems that reduce the building’s annual energy and power costs by 50 percent or more compared to the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (“ASHRAE”) standard baseline building. US Department of Energy-approved software uses simulations to calculate the reduction in energy and power costs. If a building does not qualify for the full deduction, there are partial deductions available for meeting energy reduction targets for the Lighting system, the HVAC and Service Hot Water system, and the Building Envelope system. The partial deduction is $0.60 per square foot. The energy savings targets are 25 percent for Lighting, 15 percent for HVAC, and 10 percent for the Building Envelope. There is also an Interim Lighting Rule that allows a building to qualify for a partial deduction if the interior lighting power density (watts per square foot of the interior lighting) can be reduced by at least 25 percent when compared to ASHRAE 90.1-2001. The deduction varies from $0.30/square foot to $0.60/square foot as the reduction increases from 25 percent to 40 percent. In addition to the reduction in lighting power density, the building must have certain automatic controls and bi-level switching.

Section 179D changes in 2016

Since the EPAct §179D deduction was first introduced, Congress required the energy modeling software to use the ASHRAE 90.1-2001 as the baseline standard. This standard will continue to apply for buildings placed in service in 2015, but buildings placed in service in 2016 will use an updated standard. The updated standard for 2016 is the ASHRAE 90.1-2007.

The major impact of the updated 90.1-2007 ASHRAE standards will be to the Interim Lighting Rule. The 90.1-2007 standard for interior lighting power density is more stringent than the 90.1-2001 standard. For example, under the old standard, a university was allowed a Lighting Power Density of 1.5 watts per square foot. Under the new standard, the allowed Lighting Power Density will be 1.2 watts per square foot.  Another area of impact will be for non-residential buildings of five floors or less that are more than 25,000 square feet and less than 75,000 square feet. The ASHRAE 90.1-2007 baseline HVAC system type for this type of building is different and more efficient compared to the previous standard.

If you have questions about how these changes affect you or your clients, please contact us. SourceHOV|Tax has performed numerous §179D studies across the United States using its streamlined process to certify buildings and increase tax deductions.