Like many government programs, the 179D Energy-Efficient Commercial Building Tax Deduction has been in a state of flux. Once consistently extended for multiple years at a time, the 179D tax deduction has received one-year retroactive extensions over the last few years. The most recent of these happened in February for the 2017 incentive.
The benefits of a 179D tax deduction are immense: It offers commercial building owners up to $1.80 per square foot to offset some of the costs for major energy-efficient improvements to certain building systems. This financial incentive allows building owners who might not otherwise have the means to undertake such large retrofits to create more energy-efficient buildings.According to a study commissioned by BOMA International in collaboration with other real estate groups, a long-term extension with increased deduction amounts also would create as many as 77,000 jobs and add $7.4 billion annually to the national gross domestic product. However, its benefits are more muted if retroactive renewals continue.
With facilities managers planning building improvements, it’s important to consider this industry incentive. What does the future look like for the 179D tax deduction?
The recent coverage passed by Congress only renews the 179D tax deduction for 2017, meaning 2018 is currently not covered. This doesn’t necessarily mean that it won’t be passed by this time next year. Instead, we might expect more of the same in the future.
The 179D tax deduction has been held up because it is a tax extender, a temporary tax provision that’s expected to be extended in the future for budgetary reasons. According to the Tax Policy Center, “Some are temporary because proponents want them to be permanent but cannot muster the budgetary resources to offset the cost for more than a year or two at a time.”
Thus, Congress often retroactively renews tax extenders to properly offset the budget. One such tax extender, 179D was held up in large part because of the major tax reform of 2017.
“There’s a series of tax extenders that provide a host of incentives for a number of different industries. The theory behind tax extenders is that if you only passed them for one year, you wouldn’t have to score them over a longer period of time, which would show that they cost a lot more money,” says John Bryant, Vice President of Advocacy, Codes and Standards at BOMA International. “Congress is supposed to only pass things that they can pay for or that can be offset, so it was much easier to pass tax extenders on a short-term basis.”
With tax reform in the rearview, Bryant and BOMA hope that the 179D tax deduction can be extended for years at a time, rather than putting it in place after the fact.
“This needs to be a part of the permanent tax code,” Bryant says. “For 2018, I think that Congress has been very receptive to looking at this incentive, but there are a lot of things that fell outside of tax reform. A question that Congress is struggling with right now is what else they should fund in a world where passing tax reform was very expensive to the Treasury.”
For the 179D Tax Deduction, Timing Is Everything
Retroactively renewing the 179D tax deduction might make life easier for Congress to balance the budget, but it makes things much more difficult for facilities managers.
“Our hope is that it will no longer be one of those one-off yearly extensions but rather be enshrined in the tax code as a permanent feature,” Bryant explains. “The problem with these one-off extensions is that you can’t count on them. If you’re thinking about doing upgrades and you’re at the planning stage, there’s no guarantee that the incentive is going to be there when the efficiency upgrades come online. It’s unlikely that you are going to try to achieve the levels where you would qualify.”
Renewing the 179D tax deduction for several years is also important during stronger economic periods. There was one period from 2009-2013 where 179D had been renewed. However, its impact was limited despite the multiyear renewal because the industry was still recovering from the Great Recession.
“The biggest barrier for our members in utilizing this incentive is the historical short-term nature of its extension,” explained Henry Chamberlain, President and COO of BOMA International, in his testimony to the House Ways and Means Subcommittee on Tax Policy in March. “The recent short-term or retroactive extensions don’t account for real estate’s planning horizons, which are generally three to five years for a capital investment. Even when the deduction was extended for five years between 2009 and 2013 by the Emergency Economic Stabilization Act of 2008, the recession made these investments very difficult, and by the time the industry found itself on stronger financial footing, the extension was set to expire again.”
For facilities managers to truly capitalize on energy upgrades, it will take timely action on behalf of Congress. Until then, it might be more of the same in terms of planning energy retrofits.