Taking a Holistic Approach to the 179D Tax Credit

In today’s evolving business landscape, environmental, social and governance (ESG) initiatives have moved beyond a mere compliance checklist. It’s about understanding the pressing need for sustainability and ensuring that your organization is equipped to meet the challenges of tomorrow.

But pursuing the “e” in ESG has always been challenging and often pricey. Reducing carbon emissions, for instance, necessitates making difficult and expensive choices. It’s no secret that eco-friendly products come with a hefty price tag, and implementing solutions to reduce carbon footprints can require significant investments in advanced technologies.

However, going green may not be as difficult for companies as it once was. Thanks to the new clean energy incentives recently passed, implementing a comprehensive green strategy as part of your ESG goals has become imore feasible. In particular, a high point to emerge out of the Inflation Reduction Act (IRA) last year was the revision of the Section 179D federal tax deduction, which provides immediate relief for qualifying commercial property owners and designers who implement energy-efficient improvements.

The updates to the incentive — which went into effect on Jan. 1, 2023 — broaden the tax deduction amounts available.

What Are the Updates to the 179D Tax Credit?

The 179D tax incentive was established in 2005 — and later permanently integrated into the tax code — to encourage commercial property owners to adopt energy-efficient measures. It provides immediate tax deductions to qualifying property owners and designers who undertake energy-efficient improvements in various areas, such as HVAC and hot water systems, interior building lighting and the building envelope. These deductions apply to both new constructions and renovations.

The IRA more than doubles the available 179D deduction amount, raising the maximum from $1.88 to $5.00 per square foot. In addition, the deduction can now be taken every three years rather than just once over the life of the building.

Other Energy Efficient Tax Incentives

The IRA not only includes updates to the 179D provision, but also offers a variety of tax incentives for businesses investing in renewable energy, electric vehicles and clean energy. By planning their investments and strategies around these incentives, companies have the potential to substantially reduce their tax liability.

A few of them include:

• Investment Tax Credit (ITC): The ITC is a 30% tax credit for installing designated renewable energy generation equipment, including solar, geothermal, wind and other renewable energy technologies.
• Business Credit for Commercial Clean Vehicles: Organizations that purchase qualified commercial clean vehicles may be eligible for a new tax credit, worth up to $7,500 for electric vehicles with a gross vehicle weight rating under 14,000 pounds, or up to $40,000 for vehicles weighing in excess of 14,000 pounds.
• Clean Electricity Investment Credit (CEITC): The new CEITC applies to emission-free electricity generation and storage facilities placed in service after Dec. 31, 2024. The base credit rate is 6% of the qualified investment, which can increase to 30% if the prevailing wage and apprenticeship requirements are met.

Going Green During a Recession

In the current economic climate, companies are grappling with financial challenges brought on by increasing interest rates and inflation rates. In such a volatile environment, it’s understandable that going green may not be a top priority for C-suite leaders. However, with the enhanced tax incentives, businesses have a unique opportunity to reconsider implementing renewable energy options during upcoming building construction or renovation. By investing in energy-efficient measures now, companies can significantly reduce their operating costs in the long run.

Hitting Environmentally Friendly Targets

Embracing energy-efficient solutions can be a powerful step towards achieving your organization’s environmental goals. As younger generations become more aware of how corporations operate and the impact of their actions on society and the environment, it’s crucial to demonstrate a genuine commitment to sustainability.

Companies that prioritize environmentally friendly goals are more likely to earn the trust of their consumers, thereby ensuring continued business success. Over the past few decades, environmentally conscious strategies have moved from being a niche concept to a mainstream business practice, with many companies realizing the competitive advantage that comes with adopting such standards. By aligning with these principles, businesses can not only contribute to a better future but also benefit from improved financial performance and operational efficiency.

Next Steps for the 179D Tax Credit

If your organization is interested in leveraging the benefits of the 179D tax incentive or any other clean energy tax incentives, contact our experts.