IRC Section 179D deduction clarified

May 29, 2023 News

The Inflation Reduction Act of 2022 (IRA) enacted more than $200 billion in tax incentives for clean energy. Included in the legislation were amendments to enhance IRC Section 179D, which provides a deduction for energy efficient commercial buildings. The IRS issued Notice 2022-48, requesting comments on what should be addressed in forthcoming guidance to implement changes made by the IRA to IRC Section 179D and other provisions.

The Tax Court’s January decision in Johnson v. Commissioner (160 TC 2 (2023)) clarifies a number of issues related to IRC Section 179D. Generally a taxpayer-favorable decision, the amount of the allowable deduction in the case was significantly less than the amount claimed. In addition, though these clarifications of IRC Section 179D rules are welcome, the vitality of this decision might be short-lived once new guidance is published
Section 179D

IRC Section 179D(a) allows a deduction for the cost of depreciable energy efficient commercial building property (EECBP) placed in service during the taxable year, including property installed as part of the heating, ventilation, and air conditioning (HVAC) system. The rules under IRC Section 179D were amended by the IRA. However, following are the rules that were in effect for 2013, the year at issue in the Johnson case:

The deduction under IRC Section 179D(b) is limited to the excess (if any) of the product of $1.80 and the square footage of the building over the aggregate amount of the deduction taken with respect to the building for prior years.

Among other qualifying elements, IRC Section 179D(c)(1)(D) provides that property qualifies as EECBP if it is certified by a person unrelated to the taxpayer as having been installed as part of a plan to reduce the total annual energy and power costs of the building. These costs must be reduced by 50% when compared to a reference building that meets the minimum requirements of the American Society of Heating, Refrigeration, and Air Conditioning Engineers’ applicable energy efficiency standard, Standard 90.1.

IRC Section 179D(d)(2) authorizes the secretary of the U.S. Department of the Treasury to prescribe the rules for calculating and verifying energy and power consumption and cost.

Under IRC Section 179D(d)(6), the Treasury secretary is required to prescribe how to make certifications, including procedures for inspection and testing by qualified individuals. IRC Section 179D(d)(5) requires that the certification include an explanation to the building owner regarding the energy efficient features of the building and projected annual energy costs.

IRC Section 179D(d)(4) provides that instead of claiming the deduction, a government owner of EECBP can allocate the deduction to the “person primarily responsible for designing the property,” who can claim the deduction.