There has long been criticism of the Sec. 179D tax deduction for energy efficiency improvements to commercial buildings, and rightfully so.

In recent years, the deduction has not been a strong enough incentive to significantly change the market. It has expired frequently, creating uncertainty about its availability, and it has not been particularly attractive for renovations of existing buildings—by far the largest segment of the U.S. construction market.

All this is changing with the new and improved version of the tax deduction signed into law under the Inflation Reduction Act (IRA)—and the most important improvement may well be a new pathway for using 179D in renovating existing buildings.

Traditionally, to receive the deduction, projects have had to meet energy efficiency performance 50% better than a given ANSI/ASHRAE/IES Standard 90.1 (most recently 90.1-2007). Though the targets are accessible for new construction, they often proved challenging for retrofits of existing buildings, particularly poorly performing buildings. However, existing buildings are where the action is, and tackling their emissions is imperative for meeting climate goals.

The new framework for 179D maintains a 90.1-based metric for new construction, requiring buildings to perform 25–50% better than 90.1, starting with 90.1-2007 and evolving every few years to the most recent standard affirmed by the federal government, to ensure that the bar is raised over time. For reaching that performance, buildings will be eligible for a sliding-scale deduction of $2.50–5.00 per square foot—almost triple the current maximum deduction of $1.80.

That alone is a significant improvement to the tax code that should drive a lot of activity in the years ahead, but the law also adds a new alternative framework for existing buildings to qualify for the same $2.50–5.00 per square foot deduction by improving their existing energy use intensity (EUI). It’s pretty simple—demonstrate a 25% improvement in EUI over one year and get $2.50 per square foot, increasing on a sliding scale up to $5.00 per square foot for achieving a 50% improvement.

For example, a building owner improving a 40,000-square-foot office building’s EUI by 35% with a retrofit that incorporates high-efficiency lighting, improved insulation and high-efficiency HVAC will qualify for a $140,000 tax deduction on a project that, in most cases, already pays for itself over time.

The new framework, like many of the tax incentives in the Inflation Reduction Act, takes effect starting in 2023; it has no sunset date, so it is now a permanent part of the tax code. We anticipate further guidance from the Treasury Department soon on a number of issues, including wage and apprenticeship requirements, and USGBC’s Advocacy team is actively engaged with the goal of quick implementation of the new law and streamlined adoption of updated 90.1 standards in the years to come.

According to the International Energy Agency, we need to retrofit 20% of global building space by 2030 to meet emissions targets, or 2.5% of building space annually, up from a current rate of less than 1% per year. For the United States, the economics for doing that are now getting that much better.

For more information on the Sec. 179D tax credit and other Inflation Reduction Act provisions, check out our highlights resource (and be sure to look at the details of the new 179D incentive starting on slide 13).

Read the IRA highlights resource

Improved 179D tax incentive addresses the challenge of existing buildings