Energy efficient building deduction clarification

Devin Hall, Edward Meyette, David Strong
| 1/12/2023
Energy efficient building deduction clarification
In summary
  • The IRS has issued an announcement that clarifies the energy efficient commercial building (EECB) property deduction allowed.

On Dec. 27, 2022, the IRS released Announcement 2023-1, which notifies taxpayers of the applicable reference standard required to be used to determine the amount of the EECB property deduction allowed under IRC Section 179D as amended by the Inflation Reduction Act of 2022 (IRA). The announcement identifies the existing reference standard, affirms a new reference standard, and clarifies when each of the two reference standards apply to taxpayers. The effective date of this announcement is Jan. 1, 2023.

Crowe observation

Announcement 2023-1 provides taxpayers with certainty in the energy efficient commercial building property efficiency standard. Prior to this announcement, there was uncertainty regarding application of the new and existing reference standards.

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Background

IRC Section 179D allows a deduction for the cost of EECB property placed in service during the taxable year. Among other qualifying elements, property qualifies as EECB if it is installed as part of a plan to reduce the total annual energy and power costs of a building by at least 25% (50% for property placed in service before Jan. 1, 2023) in comparison to a reference building that meets the minimum requirements of the applicable energy efficiency standard, Standard 90.1 of the American Society of Heating, Refrigeration, and Air Conditioning Engineers (ASHRAE). Since 2015, the applicable version of the standard was the 2007 version, or ASHRAE Standard 90.1-2007.

In the Taxpayer Certainty and Disaster Relief Act of 2020, Congress created a way for the U.S. Department of the Treasury to periodically update the applicable standard to allow the efficiency requirements of Section 179D to keep pace with general improvements to energy efficiency generated by the market over time. In the IRA, Congress changed this updated process to provide that effective Jan. 1, 2023, the applicable reference standard would be the more recent of the 2007 version of ASHRAE Reference Standard 90.1 or the most recent version of ASHRAE Reference Standard 90.1 affirmed by Treasury not later than four years prior to the date the property is placed in service.

Announcement 2023-1 provides that ASHRAE Reference Standard 90.1-2019 is the applicable ASHRAE reference standard for property whose construction begins after Dec. 31, 2022, and that is placed into service after Dec. 31, 2026. The following reference table in Announcement 2023-1 can be used for purposes of applying the appropriate Reference Standard 90.1:


Date EECB property placed in service

Applicable standard

Before Jan. 1, 2015

Standard 90.1-2001

After Dec. 31, 2014, and before Jan. 1, 2027

Standard 90.1-2007

After Dec. 31, 2026

Standard 90.1-2019


Under the announcement, taxpayers that began construction of EECB property prior to Jan. 1, 2023, will not be subject to ASHRAE Standard 90.1-2019 regardless of when the property is placed into service.

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Devin Hall
Devin Hall
Partner, Tax
meyette-ed-225
Edward Meyette
Partner
David Strong
David Strong
Partner, Washington National Tax