Originally passed in 2005 as part of the Energy Policy Act, this deduction was set to expire at the end of 2020 after numerous extensions. However, it was instead made permanent on December 27, 2020 as part of the Consolidated Appropriations Act, 2021.
Utilizing Internal Revenue Code Section 179D, building owners are able to claim a tax deduction of up to $1.80 per square foot (SF), adjusted for inflation, for installing energy efficient systems in either new construction, rehabilitation or remodel/retrofits of commercial buildings, and residential properties with four stories or more. Tenants responsible for their own eligible improvements can also claim the deduction. This deduction, when taken, reduces the cost basis of the asset for depreciation purposes. Currently, the deduction is available for buildings or renovations placed in service after December 31, 2005 to the current year. If the qualifying property was placed in service in a prior year, taxpayers can catch up depreciation on the qualifying property through a change in accounting method using Form 3115.
There are two ways a property can qualify for the deduction. The first method is by improving the building’s energy efficiency by at least 50% as compared to a building constructed in accordance with specified American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE) 90.1 standards. The 50% standard has gone up over the years from the 2001 ASHRAE standard to the 2007 ASHRAE standard commencing in 2016. For property placed in service after 2020, the standard will be the ASHRAE standards in effect two years before the start of construction.
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