The Inflation Reduction Act of 2024 is a significant step forward for architects and building owners focused on energy efficiency and sustainability.

With the introduction of enhanced tax deductions and credits, this legislation aims to make energy-efficient commercial buildings more financially viable. But what exactly does this mean for your next project? How can you leverage these benefits to optimize your building's performance and reduce costs?

One key element of the Act is the 179D tax deduction, which offers substantial savings for energy-efficient buildings. Understanding the eligibility criteria and distinguishing between basic and enhanced deductions is crucial.

With the adoption of ASHRAE Standard 90.1-2019 standards, achieving up to 50% energy savings is now within reach. Solutions like cove.tool can further streamline this process, providing AI-powered efficiency and validated data to fast-track your decarbonization efforts.

Are you curious about maximizing these benefits and securing significant tax credits? Keep reading to find out.

Understanding the 179D Tax Deduction

What is the 179D Tax Deduction?

The Inflation Reduction Act (IRA) is a landmark piece of legislation that offers unprecedented incentives for the architecture and construction industry to embrace sustainable design. By providing substantial tax credits and rebates, the IRA empowers architects to create energy-efficient, resilient, and environmentally friendly buildings.

Key provisions include increased tax deductions for energy-efficient commercial buildings, funding for clean energy technologies, and support for electric vehicle infrastructure. These initiatives not only promote sustainability but also drive economic growth and create jobs in the green building sector.

The 179D tax deduction is a pivotal incentive to promote energy efficiency in commercial buildings. This deduction, part of the Energy Policy Act of 2005, allows building owners and designers to claim significant tax savings for implementing energy-efficient systems.

The deduction applies to systems that reduce energy and power costs by at least 50% compared to a reference building defined by ASHRAE Standard 90.1.

The Inflation Reduction Act of 2024 has further enhanced these provisions, making it even more attractive for stakeholders to invest in sustainable building practices.

Eligibility Criteria

To qualify for the 179D tax deduction, several criteria must be met.

Primarily, the building must be located in the United States and must be an energy-efficient commercial building property (EECBP) or energy-efficient commercial building retrofit property (EEBRP). Both new constructions and retrofits are eligible.

The deduction is available to building owners, but designers of government-owned buildings, including certain government entities, Indigenous peoples’ governments, Alaska Native Corporations, and other tax-exempt organizations, can also claim it. This provision allows architects, engineers, and contractors to benefit from the tax savings for their work on public buildings.

Eligibility is also contingent on meeting specific energy reduction targets. Qualified Systems are as follows:

• Interior lighting systems.

• Heating, cooling, ventilation, and hot water systems.

• Building envelope systems.

The building must achieve a 50% reduction in energy and power costs compared to a baseline building defined by ASHRAE Standard 90.1-2007. This reduction must be verified through energy modeling and certification by a qualified individual.

Based on the ASHRAE Standard 90.1-2007 baseline of reaching 50% energy savings, the deduction can vary from $1.00 per square foot to $5.00 per square foot depending on the basic or enhanced deduction.  

Basic vs. Enhanced Deduction

The Inflation Reduction Act of 2024 introduces a tiered structure for the 179D deduction, distinguishing between basic and enhanced deductions.

The basic deduction offers $1.00 per square foot for buildings that achieve a 25% reduction in energy and power costs. This is a substantial incentive for those making moderate improvements.

However, the enhanced deduction is where the real benefits lie. Buildings that achieve a 50% reduction in energy and power costs can claim up to $5.00 per square foot. This enhanced deduction is designed to reward significant investments in energy efficiency, making it financially viable for building owners to pursue more ambitious sustainability goals.

Let’s take that a step further.

Example Calculation for Maximum IRA Deduction

Assuming a project achieves the maximum energy savings of 50% and meets prevailing wage and apprenticeship requirements, the deduction would be calculated as follows:

• Basic Deduction: $1.00 per square foot

• Enhanced Deduction: $5.00 per square foot

Total Deduction Calculation

To determine the maximum deduction you can receive, multiply the maximum per-square-foot rate by the total square footage of the building.

Example:

• Building Size: 100,000 square feet

• Maximum Enhanced Deduction Rate: $5.00 per square foot

Therefore, as an architect working on a qualified project that meets the highest energy savings and prevailing wage and apprenticeship requirements, you could potentially receive a maximum tax deduction of $500,000 for a 100,000-square-foot building.

Tax Benefits for Architects and Owners Under the 179D Deduction

For both residential and commercial projects, 179D offers generous tax deductions. For residential, an architect can claim the benefits. However, for commercial, the owner can claim the tax benefits.

Architects as Beneficiaries

For government projects, architects can benefit from the 179D deduction. This applies specifically when architects design and implement energy-efficient improvements in buildings owned by certain tax-exempt entities, such as government buildings, Indian tribal governments, Alaska Native Corporations, and other qualifying organizations.

Key Points for Architects:

• Eligibility: Architects can claim the deduction if they design qualified energy-efficient commercial building property (EECBP) or energy-efficient commercial building retrofit property (EEBRP) for residential projects owned by eligible tax-exempt entities.

• Deduction Calculation: The deduction is based on energy savings achieved, calculated per square foot of the building’s floor area. Meeting specific energy savings and prevailing wage requirements can significantly increase the deduction amount.

• Maximum Deduction: For projects achieving the highest energy savings (50%) and meeting all prevailing wage and apprenticeship requirements, architects can claim a deduction of up to $5.00 per square foot.

Owners as Beneficiaries

In the case of commercial projects, the building owners are the primary beneficiaries of the 179D tax deduction. Owners can claim the deduction for installing EECBP or EEBRP that meets or exceeds ASHRAE 90.1-2019 standards.

Key Points for Owners:

• Eligibility: Commercial building owners can claim the deduction for energy-efficient upgrades, provided they meet the required energy savings criteria.

• Deduction Allocation: The deduction must be allocated by the building owner to the architect or designer if the building is owned by a specified tax-exempt entity. This means both parties cannot claim the same deduction separately for the same work.

• Enhanced Deductions: Owners can receive enhanced deductions by meeting increased energy savings and complying with prevailing wage and apprenticeship requirements.

Both benefits aim to incentivize energy efficiency and the adoption of renewable energy solutions, making it financially feasible to pursue sustainability goals.

The Certification and Inspection Process for 179D Deduction

Navigating the 179D Energy Efficient Commercial Buildings Deduction involves meticulous planning and execution, especially during the certification and inspection process. This phase is crucial to demonstrate compliance and ensure that the energy-efficient systems qualify for the tax benefits. Here's an overview of how the process works and practical steps for your firm.

Energy Modeling During the Design Phase

Energy modeling is a critical step conducted using Department of Energy (DOE) approved software to project the building's energy performance. The primary objective is to show that the proposed energy-efficient systems will meet or exceed the energy savings targets required by the 179D deduction. This modeling sets the foundation for subsequent reviews and inspections.

Third-Party Review and Certification

A third-party reviewer, typically a licensed engineer or contractor, plays a pivotal role in ensuring that the design and installation meet the necessary standards.

Pre-Installation Review:

• Energy Modeling Review: The third-party reviewer assesses the energy modeling results and design documents. This includes verifying the projected energy savings and ensuring the design complies with ASHRAE 90.1-2019 standards.

·         The financial benefits of adhering to ASHRAE 90.1-2019 are substantial. On average, buildings designed to this standard can achieve annual energy cost savings of $0.064 per square foot. For a 100,000-square-foot building, this translates to annual savings of $6,400. Over the lifespan of the building, these savings can accumulate to a significant amount, enhancing the overall return on investment for energy-efficient design.

• Documentation Verification: All documentation is checked for accuracy and compliance with IRS and ASHRAE standards.

Post-Installation Inspection:

• On-Site Inspection: After construction, the reviewer inspects the building to confirm that the installed systems align with the design specifications and energy modeling projections. This includes:

• Visual Inspection: Checking systems like lighting, HVAC, and the building envelope to ensure they are installed as designed.

• Operational Check: Ensuring the systems are operational and functioning as intended.

• Field Verification: Conducting spot checks and measurements to validate the energy performance of the installed systems.

Final Certification:

• The third-party reviewer provides a certification that includes their qualifications, the building’s address, confirmation of compliance with projected energy savings and ASHRAE standards, a list of installed energy-efficient systems, and their projected annual energy costs. This certification must be signed under penalty of perjury.

Why Inspections Are Necessary

Verification of Compliance:

• Inspections ensure that the actual installation matches the design and energy modeling projections. Discrepancies between design and installation can significantly impact energy savings.

Ensuring Integrity:

• The independent third-party review maintains the integrity and credibility of the certification process, ensuring the tax deduction is based on actual performance, not just projections.

Practical Considerations for Your Firm

Coordinate with Third-Party Reviewers Early:

• Engage with a qualified third-party reviewer early in the design phase. Ensure they are familiar with the project and energy modeling. Provide all necessary documentation and access to project details.

Documentation and Communication:

• Maintain clear and detailed documentation throughout the design and construction process. Effective communication between your team, the third-party reviewer, and the client is essential to promptly address any issues.

Prepare for Inspection:

• Plan for the post-installation inspection by coordinating schedules and access with the third-party reviewer. Ensure that the installed systems are ready for inspection and meet the design specifications.

By following these steps, you can streamline the certification and inspection process, ensuring compliance and maximizing the tax benefits available under the 179D deduction. This thorough approach not only secures financial advantages but also reinforces your commitment to energy efficiency and sustainable building practices.

Inflation Reduction Act's Enhanced Credits

Enhanced Credit Opportunities

The Inflation Reduction Act of 2022 provides a range of enhanced credit opportunities for clean energy projects. These credits are designed to incentivize investments in renewable energy, energy efficiency, and other sustainable practices. The Act includes provisions for increased credit amounts if certain conditions are met, making it even more attractive for businesses to pursue green initiatives.

• Renewable Energy Credits: Increased credits for solar, wind, and other renewable energy installations.

• Energy Efficiency Credits: Enhanced deductions for significant reductions in energy consumption.

Prevailing Wage and Apprenticeship Requirements

To qualify for the increased credit or deduction amounts under the Inflation Reduction Act, projects must meet specific prevailing wage and apprenticeship requirements. These conditions are designed to ensure that the benefits of clean energy investments are broadly shared, supporting good jobs and workforce development. Compliance with these requirements is essential for maximizing the financial benefits of the Act.

Collaborative Benefits

Collaboration between building owners and architects is crucial for maximizing the benefits of the Inflation Reduction Act. By working together, both parties can ensure that projects meet the necessary criteria for enhanced credits and deductions. This collaborative approach not only optimizes financial returns but also enhances the overall sustainability and performance of the building.

Leveraging cove.tool for 179D Energy Modeling

cove.tool’s consulting services are designed to simplify the complex process of sustainability analysis, providing architects and building owners with the data and insights needed to optimize energy efficiency.

These solutions leverage AI and human consultants to deliver accurate and validated data, making it easier to achieve compliance with standards like ASHRAE 90.1-2019 and qualify for incentives like the 179D tax deduction.

EnergyPlus and OpenStudio for 179D Compliance

Our team of experts utilizes our AI-powered services alongside whole building energy simulations, including EnergyPlus and OpenStudio, to conduct energy modeling for your project. These advanced simulation tools are essential for meeting the 179D tax credit requirements, allowing us to deliver high-value consulting reports in a fraction of the time and at reduced costs.

AI Efficiency Alongside Whole Building Energy Simulations

A standout feature of cove.tool is its AI-driven efficiency. The platform employs advanced algorithms to evaluate various design options, identifying the most energy-efficient solutions. This not only streamlines the design process but also ensures buildings achieve optimal energy performance. By offering real-time feedback and optimization suggestions, cove.tool empowers users to make informed decisions that accelerate decarbonization and enhance sustainability.

Unlocking the Future of Sustainable Building Design

The Inflation Reduction Act of 2024 is a significant development for architects and building owners committed to energy efficiency and sustainability. By enhancing the 179D tax deduction and adopting ASHRAE 90.1-2019 standards, the Act makes it financially viable to achieve substantial energy savings. With tools like cove.tool, the path to meeting these rigorous standards becomes clearer and more achievable, thanks to AI-powered efficiency and validated data.

As we navigate these new opportunities, the collaborative efforts between building owners and designers will be crucial. The enhanced credits and deductions promise substantial financial benefits and pave the way for a more sustainable future. The question isn't whether we can afford to invest in energy efficiency—it's whether we can afford not to. The time to innovate and lead in sustainable building design is now.

Conclusion

Navigating the complexities of compliance, sustainability, and energy modeling is paramount for architects aiming to maximize the benefits of the 179D tax deduction.

The Inflation Reduction Act of 2024 presents a unique opportunity to significantly reduce energy costs while enhancing the financial viability of sustainable building practices.

By adhering to ASHRAE Standard 90.1-2019 and leveraging advanced solutions like cove.tool, architects can ensure their projects not only meet but exceed energy efficiency standards.

cove.tool's AI-powered platform, combined with whole-building energy simulations using EnergyPlus and OpenStudio, provides the precision and efficiency necessary to achieve substantial energy savings. This comprehensive approach not only simplifies the path to compliance but also accelerates decarbonization efforts.

Embracing these innovations will enable architects to lead in sustainable design, optimize building performance, and secure substantial tax benefits. The future of architecture lies in our ability to innovate and prioritize sustainability, ensuring that our buildings meet the highest standards of energy efficiency and environmental stewardship.