Bipartisan Legislation to Revamp Tax Deduction for Energy-Efficient Upgrades to Commercial Buildings

A bill introduced into the Senate seeks to extend tax deductions for building upgrades, make it easier for taxpayers to get the deductions, and give more money back. The bipartisan legislation – introduced by Sens. Olympia Snowe (R-Maine), Jeff Bingaman (D-N.M.), Dianne Feinstein (D-Calif.), and Ben Cardin (D-M.D.) on Sept. 27, 2012 – is called the Commercial Building Modernization Act (S.3591) and it would reform the existing Energy Efficient Commercial Building Tax Deduction, which is widely known by its federal tax code section: 179D.

“Streamlining the application process and delaying section 179D’s expiration would signify a major step forward in the nation’s investments in energy-efficient commercial buildings,” said Alliance to Save Energy Policy Director Lowell Ungar.

Keeping Building Retrofit Tax Deductions From Expiring

Section 179D is a federal tax deduction for the costs of installing energy-efficient systems in commercial and multi-family buildings, and it was introduced as a part of the Energy Policy Act of 2005. Section 179D  is set to expire at the end of 2013, but the Commercial Building Modernization Act aims to extend it for three more years. If the legislation is passed, the tax deduction would stay on the books until Dec. 31, 2016.

Sliding Scale Deductions to Boost Efficiency Investments

Tax code section 179D offers up to $1.80 per square foot in deductions for a 50% reduction in total annual energy and power costs compared to a reference building that meets the minimum requirements of ASHRAE Standard 90.1 2001. Partial tax deductions are also available for improvements in the building envelope, HVAC or lighting systems. 

The Commercial Building Modernization Act offers deductions on a sliding scale, allowing for tax deductions from $1.00 per square foot for a 20% source energy savings, and up to $4.00 per square foot for an improvement of 50% or more in energy savings. To lower some of the costs for upgrades upfront, building owners would be able to receive up to 60% of the deduction based on expected energy savings. And to ensure the energy savings are achieved, the remaining 40% of the deductions would be disbursed after the upgrades actually save the amount of energy they were designed to save.

Tearing Down Application Barriers to Encourage Retrofits

The bipartisan legislation also would simplify the process of applying for the deduction.  The current application process for 179D is viewed as too technical, costly, and cumbersome by certain building owners. This view has resulted in only partial building system improvements in some buildings, and none in others – despite great potential for energy savings.

The proposed legislation also provides more flexibility. Under S. 3591, existing buildings can use their prior energy use as a baseline instead of the ASHRAE standard. For new buildings, any professional who participated in the project – not just the building owner – can claim the deduction.

S. 3591 to Spur Job Creation & Economic Growth

In addition to achieving greater national energy security, the legislation also would help strengthen the American economy. In fact, a reformed section 179D would generate over 77,000 new jobs in construction, manufacturing, and service, according to a 2011 analysis by Real Estate Roundtable, Natural Resources Defense Council, U.S. Green Building Council, and others.

“By making commonsense reforms to the existing 179D tax deduction, we will help encourage energy savings, create good‐paying jobs in the construction industry, and reduce energy bills for American consumers,” Sen. Snowe, a senior member of the Senate Finance Committee, told the Coalition for Better Buildings.

Additional Building & Tax Resources

Alliance Policy and Research Intern Christina Ospina contributed to this report.