Section 179D & 45L Deductions - AER Group

Like §179D, the §45L Credit is also a provision under the Internal Revenue code that allows owners of energy efficient residential buildings to receive substantial tax benefits. Under the Bipartisan Budget Act passed on February 9, 2018, §45L and §179D were extended retroactively for a one-year period. This allows projects placed in service in 2017 to be certified for qualifying energy tax incentives. There is a three-year look-back period if tax returns are amended, and in some instances, credits can be carried forward for 20 years.

Qualifying properties are comprised of a dwelling unit or units. A dwelling unit is defined as one or more rooms including a kitchen and designed as a unit for occupancy by one family for the purpose of cooking, living and sleeping. In order to meet the requirements of Section §45L, it must also be 3 stories or less above grade and may include apartments, condominiums, assisted living facilities, student housing dwelling units, townhouses, and single-family homes. Multi-unit residential buildings of 4 stories or more qualify for Section §179D deduction.

The $2,000 tax credit is achieved for “each” dwelling unit within the buildings.

Green building construction techniques are becoming the rule rather than the exception.  This evolution has created competition and a more affordable supply of green building components.  Federal tax incentives have created an awareness in the green community and now local and state incentives are available in most regions of the country. 

Building with energy efficiency in mind is good for building owners as energy costs are reduced, good for the environment to reduce energy consumption and carbon foot print, and good for architects and contractors that take advantage of savings on government designed and constructed buildings.  The key to this win-win relationship is knowing a reputable firm that can evaluate and prepare an analysis that adheres to the certification guidelines.

A tax deduction of $1.80 per square foot is available to owners of new or existing buildings who install (1) interior lighting; (2) building envelope, or (3) 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 ASHRAE Standard 90.1-2001 (for buildings and systems placed in service before January 1, 2016) or 90.1-2007 (for buildings and systems placed in service after January 1, 2016). Energy savings must be calculated using qualified computer software and savings can not exceed the cost of qualified property.

Deductions of $0.60 per square foot are available to owners of buildings in which individual lighting, building envelope, or heating and cooling systems that partially qualify be meeting certain target levels or through the interim lighting rule. These three compliance pathways are shown in the table below.

* Savings refer to the reduction in the energy and power costs of the combined energy for the interior lighting, HVAC, and HW systems as compared to a reference building that meets the minimum requirements of ASHRAE Standard 90.1-2001 for buildings placed in service prior to 1/1/2016 and ASHRAE Standard 90.1-2007 for buildings placed in service on or after 1/1/2016.

** The tax deduction is prorated depending on the reduction in LPD. See IRS Notice 2006-52 for the definition of “applicable percentage."

*** The tax deduction varies linearly from $0.30/ft² to $0.60/ft² with the reduction in LPD from 25% to 40%. See IRS Notice 2006-52 for the definition of “applicable percentage.”

In order to qualify as energy efficient commercial property, the property must be:

• Eligible for depreciation, not for personal use.
• Located in the United States.
• Installed as part of the three primary building components:

• • Interior lighting systems,
  • Heating, cooling, ventilation or hot water systems, or
  • Building envelope.
• Certified in accordance with IRS standards as being part of a plan designed to reduce the total annual energy and power costs with respect to these systems by 50 percent or more in comparison to a reference building meeting the minimum requirements under the law using methods of calculation as prescribed by the IRS. Even better news is that partial deductions are allowed, so even if you only partially qualify you are able to receive a benefit.

Since §179D and §45L covers properties constructed and put into use in past years, taxpayers may be able to create cash flow from projects long since completed. For example, with a §179D deduction, a private taxpayer could have a study for a property previously placed in service during an eligible tax year (could be any property placed in service from 2006 to 2017) and then file a change in accounting method to take the deduction in the current filing tax period and claim a tax benefit. The same holds true for a design firm, but in that case the project would need to be within the three-year statute of limitations and would have to be filed via an amended tax return instead of a method change. Design firms have the opportunity to benefit from §179D by having the deduction allocated to them on the energy efficient government buildings they designed. This is a great opportunity for design firms!

Green building construction techniques are becoming the rule rather than the exception.  This evolution has created competition and a more affordable supply of green building components.  Federal tax incentives have created an awareness in the green community and now local and state incentives are available in most regions of the country. 

Building with energy efficiency in mind is good for building owners as energy costs are reduced, good for the environment to reduce energy consumption and carbon foot print, and good for developers and contractors that take advantage of savings on private sector housing projects.  The key to this win-win relationship is knowing a reputable firm that can evaluate and prepare an analysis that adheres to the certification guidelines.

The §45L Tax Credit is equal to $2,000 per unit for qualified owner-occupied or rental dwelling units that meet certain energy-savings standards. This is a direct dollar for dollar tax credit and not a tax deduction.  A look-back period of three years exists for qualified properties and any unused credit can be carried forward for 20 years in most cases and carried back 1 year.  In order to catch-up the credit all prior year tax returns must be amended – no change of accounting method is allowed.  Return on investment is normally between 5 and 6 times the cost of the study.

Unlike the partial qualifications allowed in the §179D deduction, the §45L credit can only be obtained if the entire property meets a level of energy efficiency that is higher than 2006 IECC standards.  Although most newer properties meet these requirements, a grade of less than this efficiency level will result in the entire complex not qualifying.  In order to evaluate a property plans, specifications, and model data must be analyzed by an independent certified energy consultant.  An eligible certifier is a person not related to the eligible contractor and one who has been accredited or otherwise authorized by the Residential Energy Services Network (RESNET) or an equivalent rating network.  A site visit must be made in order to perform testing and review the property to insure the materials used in the field are consistent with the plans and specification used for construction.

Qualifying properties are comprised of a dwelling unit or units. A dwelling unit is defined as one or more rooms including a kitchen and designed as a unit for occupancy by one family for the purpose of cooking, living and sleeping. In order to meet the requirements of §45L, it must also be 3 stories or less above grade and may include apartments, residential condominiums, affordable housing (LIHTC), assisted living facilities, student housing dwelling units, production home developments, and substantial reconstruction or rehabilitation. Housing more than 3 stories above grade does not qualify for §45L but may qualify for §179D if the requirements are met.

The $2,000 tax credit is achieved for “each” dwelling unit within the buildings.

Each unit must meet a level of energy efficiency that is higher than 2006 IECC standards. Many newer or rehabbed developments already exceed these standards based on recent energy standards and building codes. We recommend that any apartment or condominium project developed (new construction or rehabilitation) within the past four years to be evaluated for the §45L Tax Credit.

Since §179D and §45L covers properties constructed and put into use in past years, taxpayers may be able to create cash flow from projects long since completed. For example, with a §45L credit, a private taxpayer could have a study completed for a property previously placed in service within the three-year statute of limitations but, would have to be filed via an amended tax return rather than a change in accounting method. Developers (known as eligible contractors) have the opportunity to benefit from §45L by having the deduction allocated to them on residential buildings they constructed in the year which the unit was occupied or sold – not necessarily the year that the unit was built. This is a great opportunity for developers!