It may be time for businesses to consider making energy efficient upgrades to existing buildings.
If Section 179D is utilized, a taxpayer may be provided an immediate deduction of costs related to energy efficient commercial building property even though the costs otherwise would be capitalized and depreciated up to 39 years. The current deduction for the 2022 taxable year after inflation adjustments is $1.88 per square foot. Under the Inflation Reduction Act (IRA), the deduction per square foot could be as high as $5 for taxable years starting after December 31, 2022, encouraging the construction of energy efficient commercial buildings.
Energy efficient commercial building property generally means property where depreciation is allowable which:
- Is installed on or in any building which is in the United States and meets Standard 90.1, published by the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America;
- Is installed as part of the interior lighting systems; the heating, cooling, ventilation, and hot water systems, or the building envelop; and
- Is certified as being installed as part of a plan designed to reduce the total annual energy and power costs with respect to the interior lighting systems, heating, cooling, ventilation, and hot water systems of the building by 25 percent or more.
The deduction amount ranges from a base deduction of $0.50 per square foot to $2.50 per square foot if prevailing wage and apprenticeship requirements are met. In addition, the base amount can be increased between $0.02 to $0.10 for each percentage point by which the total annual energy and power costs for the building are certified to be reduced by a percentage greater than 25 percent. The maximum amount of deduction per square foot is capped at $5.
In a simple example, assume a company expends $500,000 for energy efficient commercial building property installed in Building One. The company has not previously claimed the §179D deduction. The square footage of Building One is 200,000 square feet. In 2022, the company’s §179D deduction is limited to $376,000 (200,000 x $1.88). The 179D deduction would be $376,000 and the remaining $124,000 would be capitalized.
Assume a similar fact pattern as above, but the energy efficient commercial building property is not installed until 2023. In addition, assume no certification regarding the annual energy power costs takes place. If the wage and apprenticeship requirements are not met, the §179D deduction would be limited to $100,000 (200,000 x $0.50), with $400,000 required to be capitalized. If the wage and apprenticeship requirements are met the deduction would rise to $500,000 (200,000 x $2.50), and the entire expense would be immediately deductible. If the total annual energy and power costs for the fueling the building was reduced by 50%, the square footage deduction would rise to $5 per square foot.
For more information on this topic, please contact a member of Withum’s Business Tax Services Team.