Inflation Reduction Act – IRS Publishes Announcement Clarifying Standards for Section 179 Deductions for Energy Efficient Commercial Buildings

The IRS published Announcement 2023-1, 2023-1 IRB 1 on December 23, 2022 which identifies the existing reference standard, affirms a new reference standard, and clarifies when each of the two reference standards will apply. These standards are applicable to energy efficient commercial building (“EECB”) property for the purpose of the deduction under Section 179D. The announcement became effective on January 1, 2023.

Section 179D allows taxpayers that own or lease commercial buildings in the United States to deduct a portion of the cost of EECB property placed in service during the taxable year. Property with respect to which depreciation or amortization is allowable is EECB property if it is certified to be installed to provide efficiency upgrades to one or more of three of the building’s systems:

(1) Interior lighting systems,

(2) HVAC and hot water systems

(3) The building’s envelope.

For the installation of the property on or in the building to be considered certified, the property must be certified in the manner and method prescribed by the Secretary of the Treasury or their delegate (Secretary) as being 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 25 percent (50 percent for taxable years beginning before January 1, 2023) or more, in comparison to a reference building that meets the minimum requirements of the applicable reference standard using certain methods of calculation.

The following chart provides guidance on the appropriate reference standard.