179D Commercial Building Energy-Efficiency Tax Deduction
The Inflation Reduction Act of 2022 modifies the tax incentive under section 179D of the Internal Revenue Code for energy-efficient improvements to existing commercial buildings (as well as new construction) with increased deduction limits and other changes. Beginning January 1, 2023, the energy savings targets mandated under the deduction effectively require retrofit projects to include multiple improvements in order to achieve the target reductions in energy use.
Taxpayers receive a tax deduction of $2.50-$5.00 per sq. ft. depending on the amount of energy saved.
- A $2.50 deduction is available for meeting a 25% reduction in site energy use intensity (EUI).
- The deduction increases on a sliding scale by $0.10 for each additional 1% improvement up to a maximum of $5.00 per sq. ft.
- Energy savings (i.e., EUI reduction) is based on a measurement of the building’s actual energy use over the 12-month periods before and after the energy savings measures are installed.
Projects must comply with (or demonstrate good faith efforts to comply with) certain prevailing wage and apprenticeship requirements to receive the full deduction. The deduction is capped at $0.50-$1.00 per sq. ft. for projects that do not meet the labor requirements.