For 20 years, private businesses and for-profit enterprises have been able to claim a tax deduction to help lower the cost of green building infrastructure projects. But only recently have some public sector and tax-exempt organizations been granted access, too.
The IRS’ energy-efficient commercial buildings deduction, under Internal Revenue Code Section 179D, was introduced in the Energy Policy Act of 2005 and applies to interior lighting systems; heating, ventilation and air conditioning (HVAC); hot water systems; and building envelope projects, according to the agency’s website. Both new construction with these systems and retrofits are eligible for claims.
Beginning on Jan. 1, 2023, nonprofits, government offices and other tax-exempt entities like universities and churches can also claim the 179D deduction to assist with these projects, Greg Bryant explained.
Bryant is the senior managing director of strategic initiatives at Source Advisors, a tax consulting firm in Concord that works with real estate owners, multistate commercial operations and other companies. He said the recent expansion is built on past precedent.
“There was a change in 2008 that enabled the designers of nonprofit and paid-for government buildings to potentially receive benefits (i.e., the 179D deduction) if they were actively involved with the design of a building’s energy-efficiency measures,” Bryant said.
“That really changed the landscape in terms of why there was an incentive to design these buildings, and to provide some level of tax benefit to somebody in the food chain.”
If claiming 179D, entities with property infrastructure projects completed in 2023 and beyond can see savings equaling the lesser of the cost of installation work or varying savings per square foot, per the IRS.
“If we look at the building envelope in a very simplistic way, we have floors, exterior walls and the roofing system,” Bryant said. “All those elements play some role in determining the energy efficiency of the building envelope.”
For a building with 25% energy savings, projects reduce the cost by a base amount of no lower than 50 cents per square foot, though how much over that 50 cents is subject to inflation. Buildings with energy savings of over 25% get a bonus of $0.02 for each percentage point above the 25% mark. Finally, those buildings with 50% energy savings receive up to a maximum of $1 per square foot in reduced costs.
With the changes introduced in 2023, projects can also receive a greater maximum deduction that adds to the amounts saved if local prevailing wages are paid to involved workers, and if the project meets apprenticeship requirements, known as a PWA bonus (prevailing wage and apprenticeship). The IRS states that the maximum can increase to as much as five times the base savings per square foot.
“You have a wide array of materials to consider,” Bryant said. “If you’re looking at a brick building or a building that’s made of block, the installation related to the exterior walls is going to play a huge role if the building passes (179D) or not. If we get involved with multi-story buildings where we have glass systems as well as what’s called the spangle panel — the opaque section that hides the structural form components of the building.”
Why the change now? Bryant speculated that lobbying or advocacy may have played a role in 179D’s 2023 expansion to public and tax-exempt entities, but he did note that the deduction was originally set to expire on two occasions, first in 2008, then in 2014. In both years, it was extended before becoming a permanent fixture of the Internal Revenue Code in 2020.
Source Advisors performs work in-house in New Hampshire for projects across all 50 states. Bryant said the deduction has only become more prominent in the projects he’s advised on at Source over time, ranging from private real estate developments to, additionally, public facilities since the 2023 eligibility updates.
“We just did a big project in Florida for a major airport, and there was a lot of retrofit for lighting and HVAC and things like that,” he said. “In that particular case, the primary designer was the utility company, so they were able to take the deduction in that respect.”
As tariffs on construction materials like steel and lumber are imposed, Bryant says the 179D deduction has the potential to provide some relief in installation work where it applies, which could be a shot in the arm for entities like nonprofits that rely on external funding.
“If a contractor or an end user is purchasing a piece of equipment subject to tariffs, that’s going to invariably increase the cost of that particular piece of equipment. That deduction helps to soften the blow,” Bryant said. “The deduction might not be as beautiful as it was without a tariff, but it’s yet another strategy that they should be considering.”
