Energy Efficiency Tax Deduction under IRS Code Section 179D 

Funding for: ,

What does this funding get me?

Internal Revenue Code Section 179D (IRS Section 179D) provides a tax deduction to those who build or renovate energy-efficient buildings. The tax deduction is triggered if building design results in efficiency improvements of at least 25% compared to the energy standards for the respective building’s type (e.g., school, administrative office, warehouse, housing complex, etc.). 

Building design elements that qualify (whether new construction or renovations/improvements) include heating, lighting, HVAC, hot water and building envelope (roof, walls, windows).

The amount of the Section 179D deduction depends on the resulting improvement in energy efficiency. For instance, if the building is 25% more efficient than the standard for that building type (the minimum improvement to qualify), then the Section 179D deduction is $.50 per square foot ($5,000 for a 10,000 sq.ft. building). This deduction increases $.02 per square foot for every percentage point increase in energy efficiency, up to a maximum of $1.00 per square foot for a building that achieves a 50% or more increase in energy efficiency.

There are bonuses for meeting prevailing wage and apprenticeship requirements that can increase this deduction up to 5 times the base amount (up to $25,000-$50,000 for a 10,000 sq. ft. building), though the overall deduction cannot exceed the total cost of the project. There are also annual inflation adjustments for the deduction. 

Additional details and guidance are expected from the IRS (Department of Treasury) on which nonprofits and other tax-exempt organizations qualify and how to determine efficiency improvements for this deduction. 

Am I eligible?

Available to businesses and, beginning in 2023, nonprofits and other tax-exempt entities.

How can I access the money?

Businesses claim the Section 179D deduction on their tax returns.

Tax-exempt entities use an “Allocation Letter” to authorize the transfer of the Section 179D deduction to an unrelated taxpaying entity (or entities) that are responsible for the design of the energy efficiency measure. These entities can include architects, engineers, building contractors, energy service providers or environmental consultants, who claim the tax deduction on their own tax return in exchange for adjusting the overall price or economics of the construction project. 

What is the timeline?

This tax deduction is available now. 

What other incentives could I use to help me accomplish my goals?

Schools may be eligible for grants under the Renew America’s Schools program

Local governments may be eligible for Energy Efficiency and Conservation Block Grants from the state.

Check your utility’s website for additional energy efficiency incentives.

Check the Database of State Incentives for Renewables & Efficiency (DSIRE) for additional incentives that may be offered by your state, local government, or utility, as well as important federal, state, and local policies. For questions regarding DSIRE, contact Justin Lindemann (NC Clean Energy Technology Center) at jplindem@ncsu.edu

Where can I get more information?