179D and 45L Energy Efficiency Incentives Extended

179D and 45L Energy Efficiency Incentives Extended

The passing of the latest coronavirus relief bill titled the ‘Consolidated Appropriations Act, 2021‘ (“CAA 2021”) made permanent the §179D Energy Efficient Commercial Building Deduction (§179D Deduction) and extended the §45L Energy Efficient Home Credit (§45L Credit) through December 31, 2021. These two valuable tax incentives encourage energy efficient design in both commercial and residential construction.

BACKGROUND

The §179D Deduction is a Federal tax incentive promoting energy efficient buildings for both new and existing structures. Further, architects, engineers, contractors, environmental consultants or energy services providers may also be eligible for the incentive on public projects. This incentive is often referred to as the EPAct Deduction after the Energy Policy Act of 2005 that created it, or as the §179D Deduction, which relates to its tax code section. Commercial building owners can take a Federal tax deduction of up to $1.80 per square foot of the building’s floor area if they install certain property (e.g., efficient lights or HVAC systems, added wall or roof insulation, etc.) that reduces energy and power costs. The §179D Deduction, which applies to both new construction and renovations, was set to expire in 2020.

The §45L Credit allows eligible developers to claim a $2,000 tax credit for each newly constructed or substantially reconstructed qualifying residence. It applies to single family homes, apartments, condominiums, assisted living homes, student housing, and other types of residences. The residences must not be more than three stories above grade in height. Like the §179D Deduction, §45L Credit was set to expire in 2020.

THE CHANGES

Traditionally, §179D Deduction has expired and then has been subsequently extended in one to two year increments, oftentimes long after the expiration date. Taxpayers wanting to utilize this incentive frequently needed to incur additional time and cost to amend returns for past projects, while the uncertainty of its renewal created difficulty for taxpayers to plan for it on future projects. CAA 2021 made the §179D Deduction permanent, and as such, resolves these challenges. CAA 2021 also ties the maximum §179D Deduction of $1.80 per square foot to inflation, allowing it to increase over time. The baseline standard for the §179D Deduction now compares the building to the ASHRAE standard that was in existence 2 years prior to the start of construction, which better accounts for improvements in energy efficient building materials and new technologies.

The §45L Credit would be extended through 2021 but remains essentially the same, with no changes to the credit amount or the energy efficiency baseline needed for residences to be eligible for the credit. The full text of CAA 2021 can be found here, with the §179D updates starting on page 4872 and the §45L updates on page 4914:

HOW WE CAN HELP

Out of all the buildings and homes that qualify for these incentives, very few taxpayers are taking the steps necessary to claim them. ICS can provide a free analysis to determine if these incentives are feasible, and if so, provide the necessary third-party certifications and other assistance to benefit from it. For a free consultation, please contact an ICS Tax representative.

Author: Alexander Bagne, JD, CPA, MBA, CCSP

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ICS Tax, LLC (ICS) is a consulting firm providing innovative tax planning strategies. ICS collaborates with taxpayers and their tax professionals to identify credits and incentives that reduce tax liabilities and increase profitability. ICS provides nationwide service through its offices throughout the country.