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Section 179D Tax Incentive

Understanding the Section 179D Tax Incentive

The Section 179D tax incentive is a valuable opportunity for commercial building owners to save money by investing in energy-efficient improvements. This incentive allows you to deduct the cost of qualifying improvements from your taxable income, which can lead to significant tax savings.

Section 179D is a tax deduction available for new or renovated commercial buildings that meet specific energy-efficient qualifications. This deduction is also available to designers of buildings owned by government entities and non-profit organizations.

The Inflation Reduction Act of 2022 significantly enhanced the 179D deduction, making it even more attractive for building owners. Here are some key changes:

  • Increased deduction amount: The maximum deduction has increased from $1.88 per square foot to $5.36 per square foot for buildings achieving a 50% reduction in energy and power costs. Even with a 25% reduction, the deduction starts at $2.68 per sq. ft.
  • Lowered energy savings threshold: Previously, a 50% reduction in energy and power costs was required. Now, a 25% reduction qualifies for the deduction.
  • Expanded eligibility: The deduction is now available for a wider range of building types, including those owned by tax-exempt entities like schools, universities, and hospitals.
  • No lifetime limit: You can now claim the deduction every three years (four years for some entities), allowing for repeated savings on subsequent energy-efficient improvements.

Expanded Eligibility for the Section 179D Deduction

The eligibility criteria for the Section 179D deduction have broadened significantly, allowing a more diverse group of taxpayers to benefit from the incentive. Under the revised law, the following entities are eligible:

  • Governmental entities: Includes federal, state, and local governments that can allocate the deduction to the designers of their buildings, encouraging sustainable design practices.
  • Tax-exempt organizations: Non-profit organizations, including but not limited to schools, universities, hospitals, and religious institutions, can now benefit from and allocate the deduction to their property’s designers.
  • Indian tribal governments and Alaska Native corporations: These entities are included in the list of those who can allocate the deduction, promoting energy-efficient projects within their developments.

Additionally, the law has been amended to simplify benefits for real estate investment trusts (REITs) and their shareholders:

  • Real Estate Investment Trusts (REITs): Under the new provisions, REITs can reduce their earnings and profits (E&P) by the Sec. 179D deduction amount in the year energy-efficient components are placed in service, enhancing immediate financial benefits compared to the previous requirement of spreading the reduction over five tax years.

This expansion of eligibility not only increases the deduction’s accessibility but also incentivizes a wider adoption of energy-efficient practices across various sectors, contributing to sustainability goals and operational savings.

Benefits of Claiming the Section 179D Deduction

There are several reasons why claiming the Section 179D deduction is a great investment for building owners:

  • Significant tax savings: The potential tax savings are substantial, especially with the increased deduction amount. This can free up capital for other investments or improve your cash flow.
  • Fast return on investment: The deduction is claimed in the year the improvements are placed in service, providing immediate financial benefit.
  • Minimal effort required: Roble's estimator tool simplifies the process of determining your eligibility and potential deduction amount. We can also connect you with qualified professionals to handle the certification process.
  • Increased building value: Energy-efficient buildings are demonstrably more valuable and attract higher occupancy rates.
  • Reduced energy costs: Energy-efficient improvements lower your ongoing operating expenses, further boosting your bottom line.
  • Environmental responsibility: By investing in energy efficiency, you're contributing to a more sustainable future and reducing your carbon footprint.

Why You May Not Be Claiming the 179D Deduction (and How Roble Can Help)

Many building owners are unaware of the 179D deduction or its recent enhancements. Additionally, navigating the qualification and certification process can seem daunting. Qualified tax professionals often don't have access to the real estate and energy efficiency data they'd need in order to determine eligibility. This is where Roble comes in. Our platform and estimator tool make it easy to understand your eligibility and potential savings. We also partner with qualified professionals who can seamlessly guide you through the certification process.

Estimating Your Potential Section 179D Savings

Example: Let's say you own a 100,000 square foot office building and invest in energy-efficient improvements that achieve a 40% reduction in energy and power costs. You meet the prevailing wage and apprenticeship requirements. Using Roble's estimator tool, you determine your potential Section 179D deduction to be $2,144,000 (100,000 sq. ft. x $2.68 per sq. ft. base deduction + 15% additional energy savings x $0.11 per sq. ft.).

This example demonstrates the significant financial benefit available through the 179D deduction. By investing in energy efficiency, you can save money on taxes, reduce your operating costs, and increase the value of your building.

Ready to learn more? Contact Roble today to see how we can help you maximize your savings with the Section 179D tax incentive.