In addition to taxpayers that own commercial buildings (including multifamily buildings that are at least four stories tall), the party primarily responsible for the design of government-owned building improvements has been able to claim the deduction when allocated to them by the asset owner.

Amended §179D(d)(3) expands the list of entities eligible to allocate the deduction to “any organization exempt from tax….” Therefore, organizations described under §501(c) that are exempt from taxation can now allocate the deduction to the designer.

An allocation from the asset owner to the designer must follow specific procedures which should be reviewed carefully with the taxpayer seeking the deduction.

EECBP is depreciable property; located in the U.S.; that is subject to Reference Standard 90.1 (see below for definition; generally, buildings other than low-rise residential); that is installed as part of 1) the interior lighting systems, 2) the heating, cooling, ventilation, and hot water systems, or 3) the building envelope; and that is certified to pass certain energy efficiency requirements.

Under prior law, EECBP was required to be installed as part of a plan designed to reduce the total annual energy and power costs with respect to the interior lighting systems, heating, cooling, ventilation, and hot water systems of the building by 50 percent or more in comparison to a reference building which meets the minimum requirements of Reference Standard 90.1.

If the building couldn’t meet the 50% threshold, the taxpayer could receive a lower deduction for each of the three individual building systems (lighting, HVAC & hot water, and building envelope) that satisfied various alternative energy-savings tests.

For property placed in service after 12/31/22, the building only needs to be designed to reduce total annual energy and power costs by 25%, but a taxpayer will receive an increased deduction by reducing costs up to 50% (see below). There is no longer a partial deduction allowed for the individual building systems under the alternative tests.

“Reference Standard 90.1” means ASHRAE 90.1-2007 for property that is placed in service prior to 1/1/2027. For property placed in service after 12/31/2026 and before 1/1/2029, it means ASHRAE 90.1-2019. See Ann. 2023-1. For property placed in service after 12/31/2028, it means ASHRAE 90.1-2022. See Ann. 2024-24.

The deduction has always been, and continues to be, limited to the amount of the cost of the EECBP placed into service during the taxable year. However, the maximum amount of the deduction is also limited based on the following rules.

Under former §179D, in 2022, a taxpayer was eligible for deductions of $0.63/sf (the square footage of the building) for each of the three eligible building systems, up to a maximum of $1.88/sf.

The deduction was further limited by the amount of all prior deductions claimed under §179D for the property.

Under amended §179D, the deduction is now limited (subject to annual adjustments for inflation; see next) to a maximum of $0.50/sf increased (but not above $1.00) by $0.02 for each percentage point by which the total annual energy and power costs for the building are certified to be reduced by a percentage greater than 25%.

2023 (Rev. Proc. 2022-38): $0.54/sf increased (but not above $1.07) by $0.02 for each % above 25%.

2024 (Rev. Proc. 2023-34): $0.57/sf increased (but not above $1.13) by $0.02 for each % above 25%.

2025 (Rev. Proc. 2024-40): $0.58/sf increased (but not above $1.16) by $0.02 for each % above 25%.

For property, the installation of which began prior to 1/30/2023 (see Notice 2022-61), or that meets prevailing wage and apprenticeship requirements (PWA requirements), the deduction is increased to $2.50/sf increased (but not above $5.00) by $0.10 for each percentage point by which the total annual energy and power costs for the building are certified to be reduced by a percentage greater than 25%.

2023 (Rev. Proc. 2022-38): $2.68/sf increased (but not above $5.36) by $0.11 for each % above 25%.

2024 (Rev. Proc. 2023-34): $2.83/sf increased (but not above $5.65) by $0.11 for each % above 25%.

2025 (Rev. Proc. 2024-40): $2.90/sf increased (but not above $5.81) by $0.12 for each % above 25%.

Additionally, the lifetime limitation no longer applies, and the deduction is only reduced for the aggregate deductions with respect to the building for the 3 taxable years immediately preceding the current taxable year (or in the case of any such deduction allowable to a person other than the taxpayer, for any taxable year ending during the 4-taxable-year period ending with such taxable year).

To summarize, the deduction for the taxable year is limited to the lesser of the cost of the EECBP placed in service during the year, or the excess (if any) of the $/sf limitation over the aggregate of the deductions claimed over the prior 3 taxable years.

§179D(e) requires that the basis of EECBP be reduced by the amount of the deduction allowed, even if the deduction is allocated to the designer.

However, if the deduction is allocated to the designer, the designer does not include any amount in income and is not required to reduce future deductions by an amount equal to the deduction. See Notice 2008-40, Sec. 3.06.

For older buildings that are less energy efficient than the reference building used under the standard deduction, there is an alternative that should result in a higher deduction.

Under §179D(f), a taxpayer may elect an alternative deduction for energy efficient building retrofit property made pursuant to a qualified retrofit plan. The deduction is allowed for the tax year which includes the date of the qualifying final certification under the plan. The amount of the deduction is limited to the lesser of:

• The excess of the applicable dollar value multiplied by the sq. footage of the bldg. over the aggregate amount of the deductions previously claimed under §179D with respect to the bldg. for the 3 taxable years immediately preceding such taxable year (or, in the case of any such deduction allowable to a person other than the taxpayer, for any taxable year ending during the 4 taxable-year period ending with such taxable year), or
• The aggregate adjusted basis of energy efficient building retrofit property placed in service by the taxpayer under the qualified retrofit plan.

Energy efficient building retrofit property means property 1) for which depreciation is allowable, 2) which is installed on or in any qualified building, 3) which is installed as part of the (a) interior lighting systems, (b) heating, cooling, ventilation, and hot water systems, or (c) building envelope, and 4) which is certified by a qualified professional as meeting the requirements of 2 & 3.

• A qualified building is any building located in the U.S. and was originally placed in service not less than 5 years before the qualified retrofit plan for the building.
• A qualified professional is an individual who is a licensed architect or engineer and meets other requirements as IRS may provide.

A qualified retrofit plan is a written plan prepared by a qualified professional which specifies modifications which in total are expected to reduce a building’s energy use intensity by 25% or more in comparison to the baseline energy use intensity of the building. The plan must provide for a qualified professional to:

• as of any date during the 1-year period ending on the date on which the property installed under the plan is placed in service, certify the energy use intensity of the building as of that date, (the baseline energy use intensity)
• certify the status of property installed under the plan as meeting the requirements for energy efficient building retrofit property, and
• as of any date that is more than 1 year after the date on which the property installed under the plan is placed in service, verify the energy use intensity of the building as of that date (the qualifying final certification).