The $1.4 trillion federal spending bill signed into law in December 2019 included several tax extenders that had expired at the end of 2017. Section 179D provides energy efficiency tax deductions for commercial buildings and government buildings, and Section 45L applies energy tax credits for residential and multifamily homes.
Many professionals in the construction and real estate sectors believe that the renewal of these tax incentives will provide a boost to green building projects.
The Energy-Efficient Commercial Buildings Tax Deduction (Section 179D) applies to newly constructed buildings and improvements to existing buildings that meet or exceed certain energy reduction requirements. The deduction can be claimed by building owners of commercial or multifamily properties, tenants making energy savings improvements and architects, designers and engineers of government buildings.
- Unlike most tax deductions that are based on the amount spent, Section 179D is based on affected square footage for the energy-efficient improvements. Section 179D provides for a tax deduction of up to $1.80/square foot for energy-efficient commercial building property (EECBP) that is put into service during the applicable tax year. The deduction provides the most benefit for buildings that are 25,000 square feet or larger.
- Typical energy saving improvements may include lighting, heating, and air conditioning (HVAC) systems and building envelope components.
- For federal, state and local government buildings, those companies responsible for the energy saving system’s design or installation can take advantage of the deduction.
- In addition to building owners, other project participants such as designers, architects, engineers, contractors, environmental consultants, and energy services providers may be eligible to share in the tax incentive on an energy saving project.
Eligible homebuilders, contractors and multifamily developers who are building energy-efficient homes can claim a tax credit of either $1,000 or $2,000. The credit applies to the construction of apartment buildings, assisted living facilities, affordable housing, home developments, residential condominiums and student housing as well as to substantial reconstruction or rehabilitation projects.
- The $1,000 credit applies to homes that meet the Energy Star® requirements or demonstrate annual heating and cooling energy consumption that is at least 30% less than comparable dwellings and for which building envelope components create at least one-third of the 30% reduction.
- The $2,000 credit is for homes with annual heating and cooling energy consumption that is at least 50% below comparable dwellings and for which building envelope components create at least one-fifth of the 50% reduction. Homes that conform to the Federal Manufactured Home Construction and Safety Standards and meet the 50% requirement also qualify for the $2,000 tax credit.
Section 179D and Section 45L tax incentives apply retroactively to properties placed in service after December 31, 2017, and they extend through December 31, 2020. To apply these tax incentives for properties built in 2018, you may need to file an amended 2018 tax return.
For questions about claiming green building tax deductions and credits or other tax incentive matters, contact Paul Etzler, CPA, CGMA, GACP, at 440-459-5736.