This March, BOMA International
testified before the U.S.
House Ways and Means Tax Policy
Subcommittee on the importance of the Energy
Efficient Commercial Tax Deduction, commonly referred to
as 179D, and offered solutions for making it more effective.
BOMA International President Henry Chamberlain
(pictured) spoke on behalf of BOMA International,
explaining the importance of 179D as the sole federal
energy efficiency incentive for commercial buildings. In a
post-tax reform world, the fate of 179D is uncertain. Members
of Congress are scrutinizing a host of tax incentives,
including 179D, to see if they are still needed after the
historic tax breaks embedded in tax reform for corporations
and pass-through entities. While not perfect, 179D
is the most effective way for the federal government to encourage and incentivize increased energy efficiency in
commercial buildings.
First enacted by Congress in 2005, 179D has offered
commercial building owners up to $1.80 per square foot
(psf) to offset some of the costs for major energy-efficient
improvements made to heating, ventilation and air-conditioning
(HVAC) systems; the building envelope; and
lighting upgrades that exceed ASHRAE Standard 90.1
by 50 percent. A partial deduction of $0.60 psf also has
been available for retrofits of individual building systems.
Buildings must be independently certified to receive a deduction. The tax deduction helps
property owners who might not
otherwise have the necessary capital
make the decision
to design, retrofit and
operate energy-efficient
structures.
The short-term
nature of 179D
has proven to
be the biggest
barrier to the
utilization of
the incentive.
Reducing energy use
in buildings is something
that affects not
only building owners
and tenants, but
also the communities
they support. Energy
efficiency in commercial real estate
reduces carbon emissions, as well
as peak demand. Because energy efficient
building systems have such
a long-term payback period, it can
be difficult to make the initial financial
investment. Achieving 50 percent
greater than code requirements—as
required by 179D—can take decades
to recoup costs through utility savings.
179D helps fill in the gaps and reduce
the time frame to achieve a return on
investment.
However, there are significant improvements that could be made
to the legislation. Currently, 179D
doesn’t fully take into account the age
of a building. Although older buildings
can greatly benefit from energy
efficiency upgrades, the relatively
recent shift in building codes towards
efficiency leaves them at a significant
disadvantage in achieving the 179D
requirements. In its current form, the
requirements to earn a tax deduction
are out of reach for many existing
buildings, which account for 98 percent
of all building stock.
The short-term nature of 179D has
proven to be the biggest barrier to the
utilization of the incentive. For years,
the tax deduction has been included
in what Congress calls “tax extenders.”
These extenders apply to a series
of tax incentives that Congress deems
useful, but they typically are enacted
on a yearly—rather than permanent—
basis. While this tactic makes it
easier to pay for the extenders, it does
not account for real estate’s planning
horizons, which are generally three to
five years for a capital investment.
A study commissioned by BOMA
International, along with other members
of the Coalition to Extend and
Improve the 179D Tax Deduction,
highlights the benefits of extending
and modernizing the incentive. The
study estimates that as many as 77,000
jobs will be created and $7.4 billion
will be added annually to the gross
domestic product (GDP) if Congress
passes a long-term extension and
modification of 179D. Strengthening
and modernizing 179D would come
with huge benefits, including the addition
of $5.7 billion in personal income
for the first 10 years after enactment.
Energy efficiency is considered
a mainstay practice in commercial
building operations and a core component
of major building retrofits.
Energy-efficient buildings enjoy lower
operating costs and can attract tenants.
Section 179D has proven to be
a valuable industry resource over the
past decade, and, with an extension
and some adjustments, it will continue
to drive the commercial real estate
industry forward.
This article was originally published in the May/June 2018 issue of BOMA Magazine.