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What is 179D?

Writer's picture: Greg PacioliGreg Pacioli

The 179D tax deduction, also known as the Energy-Efficient Commercial Buildings Deduction, is a section of the tax code designed to incentivize energy efficiency in commercial properties. Enacted as part of the Energy Policy Act of 2005, 179D allows building owners and designers to claim a tax deduction for implementing qualifying energy-efficient improvements in commercial buildings.


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Fundamentals of 179D


  • Energy Efficiency Focus: The deduction applies to improvements made to lighting systems, HVAC (heating, ventilation, and air conditioning) systems, and the building envelope (walls, roof, windows, etc.).


  • Deduction Limit: As of recent updates, the deduction allows up to $5.00 per square foot for qualifying properties that meet specific energy efficiency standards.


  • Eligibility: Building owners, as well as architects, engineers, and contractors working on government-owned buildings, may qualify for the deduction.


The Importance of the Section 179 Deduction


While 179D is specific to energy-efficient buildings, the broader Section 179 deduction offers effective tax-saving opportunities for property owners by allowing them to deduct the cost of certain assets in the year they are purchased, rather than depreciating them over time. This deduction applies to tangible assets like machinery, equipment, and even certain software, making it a critical tool for reducing taxable income.


Benefits of Section 179 Deduction:


Immediate Tax Relief:

Encourages Investment:

Flexibility:



How Depreciation Expense Helps Business Owners Keep More Money


Depreciation is a method of allocating the cost of an asset over its useful life. While Section 179 allows for immediate expensing, traditional depreciation spreads the deduction over several years. Both methods provide financial benefits by reducing taxable income, but depreciation expense also offers steady, ongoing tax savings.


Main Advantages of Depreciation:

  • Reduces Tax Burden: By claiming depreciation deductions, business owners effectively lower their taxable income, keeping more money within the business.


  • Supports Long-Term Planning: Unlike Section 179, which provides immediate relief, depreciation offers consistent deductions over time, which can help with financial forecasting and cash flow management.


How 179D, Depreciation, and Cost Segregation Work Together


Cost segregation is a tax strategy that accelerates depreciation by identifying components of a building that can be depreciated over shorter timespans and can be used for residential and commercial properties.


Here’s how cost seg ties into 179D and depreciation:


  1. Complementing 179D: If a building undergoes energy-efficient improvements that qualify for the 179D deduction, cost segregation can further enhance tax savings by reclassifying other components of the building for accelerated depreciation.


  2. Maximizing Deductions: Cost segregation helps business owners identify every possible deduction, ensuring they take full advantage of opportunities like Section 179.


  3. Boosting Cash Flow: By combining accelerated depreciation, and the Section 179 deduction, business owners can significantly reduce their tax liability, freeing up capital for reinvestment.



Conclusion

Section 179 deduction and depreciation are essential tools for business owners looking to minimize their tax burden and gain financial efficiency. When used strategically with cost segregation, this game plan can provide substantial cash liquidity, empowering businesses to invest in growth and innovation.


To fully leverage these opportunities, consult with a tax advisor or cost segregation specialist who can tailor strategies to your specific circumstances and ensure compliance with IRS guidelines.

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