The Consolidated Appropriations Act, 2021 (CAA), which passed both houses of Congress on December 21st and was signed into law on December 27th, includes support for energy efficient design. The 179D energy efficient commercial buildings federal tax deduction (179D), which had been scheduled to expire at the end of 2020, was made permanent.
Since 2006, the 179D (26 U.S. Code § 179D) has enabled building owners or tenants to claim a federal tax deduction of up to $1.80 per square-foot for constructing or renovating qualifying systems and buildings. The deduction is available to owners of new or existing buildings who install interior lighting; building envelope improvements; or heating, cooling, ventilation, or hot water systems that reduce the building’s total energy and power cost by 50% or more in comparison to a building meeting minimum requirements set by the “Reference Standard,” which is the applicable ASHRAE Standard 90.1.
If the system or building is installed on federal, state, or local government property, the 179D may be assigned to the entity primarily responsible for the system’s design. Because government building owners commonly are not liable for federal income tax, the government entity can provide an “allocation letter” so that the deduction can be taken by the designer or constructor of the building or improvements. This has been a tremendous benefit for architects, engineers, or contractors who perform design work for state, local, or federal government entities, including public school districts and colleges.
The tax provisions of the CAA include benefits that encourage the energy efficient design of private and public buildings. While the 179D is now coupled to a higher energy efficiency minimum, the deduction will be indexed annually for inflation.
The law now uses the term “Reference Standard 90.1,” which means, with respect to any property, the most recent Standard 90.1 published by the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America. The standard must not have an effective date that is later than the date 2 years before the date that construction of such property begins.
What this means is that the 179D has been available for improvements that reduce a building’s total energy and power cost by 50% or more in comparison to a building meeting minimum requirements set by Standard 90.1-2007 for buildings and systems placed in service after January 1, 2017. Before that date, ASHRAE 90.1-2001 was used. Presumably, ASHRAE 90.1-2019 (with its higher standard) will now be required.
In California, the 179D now allows for use of the most recent California Nonresidential Alternative Calculation Method approved by the Department of Energy two years before the date that construction of the property or energy efficiency improvements begin.
The updated 179D will help reduce non-residential energy use and, with other support for subsidies and tax benefits, assist the U.S. in countering climate change. The higher standard to qualify will be out of reach for most existing buildings. However, when a new construction project is put into service, this green tax incentive will be extremely valuable to commercial owners, tenants making improvements, and design firms providing professional services on government projects.