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What Is the 179D Deduction, and How Can You Benefit?

Geoffrey Kayton, Principal, Citrin Cooperman Advisors LLC / Berdon Advisors LLC

11.21.22 | TAX Chat

The 179D deduction is not new, but the Inflation Reduction Act (IRA) changed its application and mechanics while greatly increasing the maximum potential benefit. This post is an overview of the types of projects that qualify for the accelerated deduction and how to reap the benefits.

How to Qualify

IRC Section 179D allows businesses a current deduction for certain energy-efficient building improvements that ordinarily would need to be capitalized. The traditional benefits are available to ground-up construction for commercial and high-rise residential buildings. Some alternative benefits are available to low-rise residential and single-family homes. To benefit, a taxpayer must obtain a certification from a licensed architect or engineer indicating the improvement is qualifying energy-efficient building property, meeting certain standards set by the government. The taxpayer should seek the help of a qualified professional at the outset to determine potential benefit and associated costs. Once that certification is provided, a taxpayer may be entitled to an accelerated deduction of building basis up to $5 (inflation adjusted) per square foot. While the IRA greatly increased the potential benefit to $5 per square foot, if certain labor standards are not met, that maximum benefit drops to $1 per square foot. However, the IRS will need to issue guidance on how the labor standards will be applied. Taxpayers will be able to take the full $5 per square foot 179D deduction until at least six months after such guidance is released.

Other Considerations

  1. Applicable to property placed in service after 12/31/22.
  2. The deduction can be allocated away from government and non-profit entities, so designers of buildings qualify for the deduction.
  3. REITs now have conformity for the earnings and profits computation.
  4. The deduction is subject to recapture as ordinary income on disposition. Fully recaptured in the year of sale at ordinary income rates, even if sold using the installment method.
  5. This is not accelerated depreciation, so it’s generally not subject to the same state limitations as bonus depreciation.

Our Role

Similar to research and development credits, professional firms are available to perform the necessary modeling to ensure standards are met to take the deduction and a cost/benefit analysis. We do not provide these services but can refer professionals who do. Once this information is available, we can help determine the income tax benefit associated with available options.

If you have questions, I can be reached at 212.331.7525 | gkayton@berdonllp.com

Geoffrey Kayton is a Senior Tax Manager with more than 10 years of professional experience. He advises a diverse array of clients across the real estate sector on a variety of tax matters.

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