Section 179D of the Internal Revenue Code — the Energy-Efficient Commercial Buildings Tax Deduction — has played a significant role in making buildings more energy efficient since it went into effect in 2006. Its most recent extension expired Dec. 31, 2016, and with discussions in Washington on tax reform, many building owners and designers are wondering if this tax incentive will be renewed.
Section 179D allowed commercial building owners to take a tax deduction of up to $1.80 per square foot for new construction or existing buildings that received qualifying upgrades for energy efficiency. Up to $0.60 per square foot was available for each of three categories: lighting upgrades, HVAC upgrades and building envelope upgrades, such as window replacements, roofing and insulation. The total deduction one could claim depended on how much the upgrade exceeded the applicable energy efficiency standard.
Government entities also benefited from 179D by being allowed to allocate the value of the deductions to their project designers. This provided a significant financial incentive for the architectural or engineering firm, energy service company or designing contractor to help the entity meet or exceed its energy efficiency goals while reducing utility costs.
Popular with several industry and real estate groups, 179D has received bipartisan support in Washington. The most recent extension was a part of the Protecting Americans from Tax Hikes Act of 2015. This extension was retroactive to the beginning of 2015, providing building owners and industry groups with cautious optimism that a similar agreement could be reached before the end of the year.
However, this year, nothing appears certain as the current administration and Congress are pushing for broad tax reform. While there have been several pieces of legislation introduced over the last several months to extend, make permanent or increase the amount of the deduction and to allow nonprofit entities to allocate deductions, no new legislation pertaining to 179D has been passed. If simplification of the tax code is truly the objective in Washington, Section 179D, along with hundreds of other “special” tax deductions, may be gone for good.
Hanson will continue to monitor the status of the 179D deduction on behalf of our interested clients. For additional information, please contact Tim Schroeder at firstname.lastname@example.org.