Good News For LED Lighting Upgrades: What EPAct 179D Really Means

The commercial buildings tax deduction, also referred to as 179D, Section 179D, or EPAct179D, is permanent.

There are other significant changes, too. Here’s how Section 179D changed when the President signed the COVID-19 stimulus package:

• Lighting retrofits (and other building upgrades) completed in 2020 are eligible for tax deductions
• Tax deductions for energy efficient improvements permanently extended
• $1.80 per square foot tax deduction will grow each year by inflation
• Projects are compared to ASHRAE standards that existed two years before construction started

The tax deductions are retroactive, so if you completed a lighting retrofit anytime between 2006 and now, it’s time to get your paperwork together.

What is Section 179D?

The Energy Policy Act (EPAct) was created in 2005. It went into effect January 1, 2006 and primarily provides tax savings for building owners who improve energy savings in new construction or remodel projects.

The goal of EPAct was to incentivize energy reduction. The U.S. Department of Energy says commercial buildings are responsible for half of all building energy consumption in the United States.

Section 179D outlines tax deductions available for commercial buildings. It's a tremendous help to businesses that install energy saving alternatives, like lighting retrofits.

The maximum tax deduction is outlined as $1.80 per square foot of the upgraded space.

That’s comprised of three different partial deductions:

1. $.60 per square foot for interior lighting
2. $.60 per square foot for building envelope improvements
3. $.60 per square foot for HVAC system upgrades

To put this in perspective, a 100,000 square foot building that qualifies for maximum deductions could receive a $180,000 tax credit.

Under the new regulations, that credit will increase every year to account for inflation.

Of course, not every building will qualify for the maximum deduction, but that shouldn’t discourage you from applying. Partial deductions can still result in significant savings.

To qualify, specific software and IRS forms are required, as well as an energy-modeler or engineer to perform the analysis. 

The list of approved software can be found  here.

Resources to learn more about Section 179D:

• Energy Tax Savers
• Energy Star
• Department of Energy

Qualifications For Commercial Building Tax Deductions

There are several qualifications your business needs to meet in order to receive the tax deductions outlined in 179D.

As a general rule, EPAct 179D applies to commercial buildings that include the following:

• Retail buildings
• Apartment buildings four stories or higher
• Office buildings
• Warehouses
• Industrial buildings

To get the full deduction of $1.80 per square foot, energy and power costs need to be reduced by 50% compared to ASHRAE Standard 90.1-2007 (or 90.1-2001 for buildings or systems placed in service before January 1, 2018).