IRC Section 179D
The Section 179D tax deduction offers significant savings for businesses that invest in energy-efficient lighting, and Lights There is here to help you take full advantage of this opportunity. We guide our clients through the process, from understanding the eligibility criteria to completing the necessary paperwork, ensuring that you receive the maximum benefit. Our expertise in this area not only helps you save money but also reinforces our commitment to promoting sustainable, energy-efficient solutions that are good for your business and the environment.
Lights There is committed to helping you maximize your savings through the Section 179D tax deduction. Our team guides you through the process of qualifying for significant tax benefits by upgrading your building’s energy efficiency with our LED lighting solutions. We’ll assist in ensuring that your project meets the necessary criteria, enabling you to take advantage of substantial deductions while improving your facility’s energy performance. Let us help you achieve both financial and environmental benefits through strategic energy upgrades.
SECTION 179D: THE ENERGY EFFICIENT COMMERCIAL BUILDINGS TAX DEDUCTION
What is Section 179D?
Section 179D of the U.S. Internal Revenue Code provides a valuable tax deduction to encourage energy efficiency in commercial buildings. This deduction is available for building owners or designers who improve energy usage, specifically through systems like lighting, HVAC, hot water systems, and building envelopes (roof, walls, insulation) . The goal is to reduce energy consumption, cut operational costs, and contribute to environmental sustainability.
History of Section 179D
Enacted in 2005 as part of the Energy Policy Act, Section 179D was created to incentivize businesses to adopt energy-efficient technologies. Originally a temporary measure, it aimed to address rising energy costs and environmental concerns. Over time, it has been extended and improved with legislation such as the *American Recovery and Reinvestment Act of 2009 and, most recently, the Inflation Reduction Act (IRA) of 2022, which further expanded its reach.
In 2020, the Consolidated Appropriations Act made Section 179D permanent, removing the uncertainty of periodic renewals. The permanency ensured businesses could continue making energy-efficient improvements with confidence that they would receive tax benefits.
The Inflation Reduction Act and Its Impact on 179D
The Inflation Reduction Act (IRA) of 2022 brought significant enhancements to Section 179D:
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Increased Deduction: Under the IRA, the maximum deduction per square foot increased. Starting in 2023, the deduction is $5.00 per square foot for the highest levels of energy efficiency improvements, up from the previous maximum of $1.88. This is a substantial increase aimed at making energy efficiency more financially attractive.
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Sliding Scale for Energy Savings: Instead of requiring a 50% energy savings to claim the deduction, the IRA introduced a sliding scale. Now, buildings that achieve energy savings as low as 25% can still qualify for a partial deduction, with the amount increasing as energy savings increase.
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Retrofit Focus: The act places a particular emphasis on retrofits, aligning with Lights There’s focus. This allows older buildings to qualify for deductions when they upgrade to energy-efficient lighting solutions, which is a key area for our clients.
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Apprenticeship and Prevailing Wage: Projects claiming the enhanced deduction of up to $5.00 per square foot must meet specific labor requirements, including paying prevailing wages and employing registered apprentices.
These changes reflect the government’s stronger commitment to reducing the carbon footprint of commercial buildings and accelerating the adoption of energy-efficient technologies like LED lighting.
How Section 179D Works
The tax deduction is based on how much a building’s energy consumption is reduced due to upgrades. Specifically, it applies to improvements in three key areas:
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Interior Lighting Systems
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HVAC and Hot Water Systems
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Building Envelope (roof, walls, insulation)
For buildings that achieve a 50% or more reduction in total annual energy costs compared to a baseline standard, the maximum deduction is $5.00 per square foot. Even if buildings don't reach that, partial improvements can qualify on a sliding scale for smaller deductions, starting at 25% energy savings.
Who Qualifies?
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Commercial Building Owners: Any business owner upgrading their commercial property with energy-efficient systems like LED lighting can qualify for the deduction.
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Designers of Public Buildings: For government-owned buildings such as schools, hospitals, or government offices, the deduction can be allocated to the designer, which includes lighting contractors, engineers, and architects.
Important Note: To claim the deduction, energy modeling must be conducted by a certified engineer or contractor to verify the building’s energy savings. Lights There partners with certified professionals to ensure your lighting retrofit meets the required standards for Section 179D.
How to Claim the Deduction
Claiming the Section 179D deduction involves a few key steps:
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Energy Modeling and Certification: A licensed professional must conduct an energy analysis of the building, typically comparing the current energy consumption with the consumption after the LED lighting retrofit.
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Filing with the IRS: Once certified, the business can claim the deduction on its tax return. For public building projects, the designer or contractor can receive an allocation letter from the government entity that owns the building.
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Record Keeping: It's crucial to retain all relevant documentation, including the energy model and certification, as the IRS may require this during an audit.
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ASHRAE Standard: The energy savings must meet or exceed the guidelines in ASHRAE Standard 90.1, which is updated regularly to reflect the latest in energy-efficient building standards. (Read More)
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Partial Deductions: If your LED lighting retrofit doesn’t achieve a full 50% reduction in energy usage, you can still qualify for deductions on a sliding scale starting at a 25% reduction.
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Retroactive Claims: Businesses can claim Section 179D retroactively by amending past tax returns, provided the improvements were made after 2006.
Benefits of Section 179D
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Tax Savings: The deduction allows for significant savings on federal taxes, which can reduce the upfront cost of LED lighting retrofits.
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Lower Operating Costs: Energy-efficient buildings consume less power, which means reduced utility bills.
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Environmental Impact: By reducing energy usage, businesses lower their carbon footprint, contributing to a more sustainable future.
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Competitive Advantage: Energy-efficient buildings are more attractive to tenants, employees, and customers, and they meet increasing regulatory requirements for sustainability.
Section 179D & Lights There
At Lights There, we specialize in helping businesses upgrade to energy-efficient lighting that not only reduce your building’s energy usage but also help you qualify for valuable tax deductions under Section 179D. By installing modern LED lighting, our clients not only save on utility costs but may also qualify for the 179D tax deduction, amplifying their financial returns. We work closely with certified professionals to ensure your upgrades meet all the necessary qualifications to maximize your energy savings and tax benefits.
ASHRAE and Standard 90.1
What you need to know
Who is ASHRAE?
ASHRAE stands for the American Society of Heating, Refrigerating, and Air-Conditioning Engineers. Founded in 1894, ASHRAE is a global organization that develops standards and guidelines for building systems, energy efficiency, indoor air quality, and sustainability. While its name may suggest a focus on HVAC systems, ASHRAE’s scope extends to all energy-related building standards, including lighting.
ASHRAE’s mission is to promote the advancement of technology for sustainable energy systems, and they’re considered a leading authority in setting energy efficiency standards for commercial and residential buildings. Their standards are often adopted by governments and regulatory bodies around the world, including being directly referenced in Section 179D.
What is ASHRAE Standard 90.1?
ASHRAE Standard 90.1 is one of ASHRAE's most important and widely used standards. It sets the minimum energy efficiency requirements for commercial buildings (except low-rise residential buildings).
The standard covers areas such as:
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Lighting systems
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HVAC systems
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Building envelope (roof, walls, insulation, windows)
Standard 90.1 is updated regularly to reflect advances in technology and new energy-efficient practices. For example, as LED lighting has become more efficient, the standard has raised its energy performance requirements to reflect this innovation. By keeping pace with new technology, Standard 90.1 ensures that buildings are continually improving in terms of energy efficiency.
Why is ASHRAE Standard 90.1 Important for Section 179D?
When it comes to claiming the Section 179D deduction, buildings must demonstrate energy savings over a baseline standard—and this baseline is established by ASHRAE Standard 90.1. Specifically, energy improvements must exceed the energy efficiency standards set by ASHRAE 90.1 for the year the building permit was issued or the renovation was completed.
For example:
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If you're retrofitting an older building with LED lighting, your energy savings are measured against the energy performance standards from ASHRAE 90.1 for the year that applies to your building.
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To qualify for the full Section 179D deduction, your lighting upgrades need to reduce the building’s energy consumption by at least 50% compared to this baseline. However, with the Inflation Reduction Act, partial deductions are available for buildings achieving as little as a 25% energy reduction.
Why Do These Numbers Matter?
For businesses looking to claim Section 179D, understanding and meeting ASHRAE Standard 90.1 requirements is critical.
Here's why:
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Compliance: The energy modeling that determines your eligibility for Section 179D is directly tied to how your building performs against ASHRAE 90.1 standards. If your upgrades (like LED lighting retrofits) don't meet the required energy efficiency levels, you may not qualify for the full deduction.
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Maximizing Savings: Achieving higher energy savings (e.g., a 50% reduction) will allow you to claim the maximum deduction of up to $5.00 per square foot. If your energy savings are lower, you’ll receive a smaller deduction, but still valuable, thanks to the new sliding scale introduced by the Inflation Reduction Act.
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Long-Term Efficiency: Upgrading your lighting system to exceed ASHRAE 90.1 standards not only helps you qualify for tax deductions, but it also ensures your building operates more efficiently, leading to ongoing savings on energy bills.
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Sustainability Goals: Many companies and government entities have sustainability targets. By adhering to or surpassing ASHRAE 90.1 standards, you’re ensuring your building is compliant with best practices for reducing environmental impact.
ASHRAE & Lights There
At Lights There, we focus on LED lighting that meet and exceed ASHRAE Standard 90.1, helping your business achieve maximum energy savings and qualify for Section 179D. By upgrading to modern, energy-efficient lighting, we help businesses reduce energy costs, improve sustainability, and take advantage of valuable tax benefits.
