With the tax deadline looming, many businesses are scrambling for ways to reduce their tax burden, looking for any deduction, rebate, or incentive that can chip away at what they owe Uncle Sam. One important—and often overlooked—way to increase the return on investment on commercial buildings is through the EPAct 179D Tax Deduction that incentivizes energy efficient building design.
At the very end of 2015, Congress passed the “Protecting Americans from Tax Hikes Act of 2015” (PATH Act) to continue a variety of tax credits and deductions, including the Section 179D deduction that allows for taxpayers to claim up to $1.80 per square foot in refunds for building projects that exceed energy efficiency standards by 50%. This bill retroactively extended the credits established in the Energy Policy Act of 2005 through 2015 and continued them through December 31, 2016. This extension is good news for business owners and building designers who are working on energy efficient projects because it allows them to increase their return on investment. As part of the extension, some of the qualification requirements were made more rigorous to increase the energy efficiency standards for new buildings.
EPAct 179D allots deductions based on three separate energy efficient components: lighting, HVAC (Heating, Ventilation, and Air Conditioning), and building envelope. The amount of the deduction is determined by how many of these components implement energy efficient design.
- 1 Component: To qualify for a $0.60/sq ft deduction, energy efficiency improvements must be made in one of the three components.
- 2 Components: To qualify for a $1.20/sq ft deduction, energy efficiency improvements must be made in two out of the three components. Each component must qualify for the $0.60 deduction on its own before they can be combined for the $1.20 deduction.
- 3 Components: To qualify for the full deduction of $1.80/sq ft, energy efficiency improvements must be made in all three components—lighting, HVAC, and building envelope—AND improve the building’s energy use by a total of 50% or more.
So, what’s different about the 2005 version of the EPAct 179D deduction and the new extenders bill?
First of all, the baseline energy efficiency standard has changed. Both bills use the ASHRAE (American Society of Heating, Refrigerating and Air-Conditioning Engineers) Standard 90.1, which provides the minimum requirements for energy efficient building design. Standard 90.1 is updated about every three years to reflect rapid changes in energy technology. The original bill used standards established in 2001 and 2004, but the Extender Bill uses the 2007 standard as its baseline. Overall, the 2007 standards require buildings to use about 15% less energy than the 2001 version.
In addition to a change in the baseline, specific efficiency standards have also gotten a little more strict.
- In lighting , power densities should be about 30% less than they were before.
- For HVAC, air conditioners need to be slightly more efficient—by about 7%.
The biggest changes have occurred in requirements for the building envelope, so that materials need to better resist heat transfer to insulate in all components of the building more effectively.
- Walls should transfer about half as much heat under the extender as they could under the original bill.
- Roofs should transfer about 24% less heat than they could before.
- Windows, too, should be about 40% more resistant to heat transfer.
Although these numbers might seem intimidating, thanks to ever-improving technology it’s not all that hard to improve a building’s efficiency—especially in lighting and HVAC systems. Furthermore, meeting these EPAct efficiency standards will help you stay abreast of changes standard building codes as they are revised to reflect the new ASHRAE guidelines. Energy efficient LEDs have become much more affordable and they are one of the easiest ways to lower the lighting power density. Occupancy sensors and new controls systems for both lighting and HVAC can dramatically lower energy consumption as well. If you’re renovating or constructing a new building, you can make efficiency a design priority so it meets the EPAct standards—and therefore improves your return on investment.
If you have a building project that might qualify for the EPAct 179D Tax Deduction, read more about our EPAct services here. Or, click below to contact our EPAct department directly for a free consultation about your building project.
 Power density means the amount of energy used to power the lights per square foot. Power density can be reduced by either lowering the number of light fixtures or by using lighting that requires less energy.