October 26, 2022

How the Inflation Reduction Act Helps You Save More by Going Green

The Inflation Reduction Act became law in August 2022, and it could mean significant increases in tax deductions for businesses that invest in energy-efficient design and construction. Companies that meet new energy efficiency requirements could see more than 2.5 times greater tax deductions starting in 2023.

The act will raise the previous Section 179D Energy Efficient Commercial Buildings Deduction to a new maximum of $5 per square foot. Until the end of 2022, the maximum deduction for energy-efficient new builds or retrofits is only $1.88 per square foot. That means an additional $312K in deductions on a 100,000-square-foot project under the new rules.

The act also makes updates to some of the requirements to qualify for the deductions. With these changes, it’s more important than ever to partner with a team with experience in energy-efficient design and construction. With expert guidance, your organization can meet energy efficiency goals and realize additional tax savings.

Highlights of the Section 179D changes

The new Section 179D requirements and deduction maximums take effect for buildings put into service on or after Jan. 1, 2023. Deductions start at 25% energy use reduction and go up to a maximum of 50% energy use reduction.

  • Businesses that show a reduced energy usage of 25% based on the American Society of Heating, Refrigerating and Air-Conditioning Engineers standard may claim a $2.50 per square foot deduction.

  • The dollar amount is then incrementally increased, with each percentage point equaling 10 cents. For example, a project that reduces energy usage by 35% could claim a $3.50 per square foot deduction.

  • Projects that reduce energy usage by 50% will qualify for the maximum deduction of $5 per square foot.

  • These projects must also meet new prevailing wage and apprenticeship requirements for workers involved in the project in order to receive the full incentive amount.

Additionally, while the previous deductions had a lifetime cap, the new Section 179D deduction will reset every three years for commercial buildings. That means organizations have the opportunity to claim the full deduction again, encouraging ongoing energy efficiency improvements.

Making your project more energy efficient

To achieve a reduction in energy usage, businesses should work with a design-build partner to focus on key areas of energy efficiency, such as heating, cooling, ventilation, hot water systems, lighting, and building envelope. Some examples include:

  • Central plant equipment: Central utility plants, including chillers for HVAC systems

  • HVAC systems: new HVAC units with technology for reduced energy use, energy efficient roof-top units, HVAC and airflow studies, HVAC load modeling, indoor air quality assessments, optimal start for major HVAC equipment, and green cleaning program development

  • Lab exhaust systems: Accounting for exhaust system load impacts and modifying designs to ensure the entire building runs efficiently

  • Design and control strategy optimization: Modular heat recovery chillers, energy-efficient air handling units, direct digital control systems, demand-controlled ventilation, airside economizers, enthalpy-type heat recovery, high-efficiency variable air volume (VAV) systems, energy recovery units (ERUs), energy-efficient lighting, and energy-efficient glazing

When it comes to Section 179D standards, detailed processes paired with guidance from a sustainability specialist are key. A team with multiple areas of expertise and ongoing collaboration will help your organization navigate the complex aspects of energy-efficient projects.

Helping you find savings through sustainability

Sustainability is one of the three pillars that C1S stands on. We offer a designated sustainability specialist on staff who focuses on LEED certification and commissioning, as well as engineers with extensive experience in energy-efficient design.

Most importantly, we understand that energy-efficient buildings aren’t just about going green. They offer ROI for your organization. We help you accomplish sustainability projects that give you genuine savings in utility and energy costs. And now, these projects could mean even more cost-saving benefits for your company through the Inflation Reduction Act’s increased tax incentives.