Maximizing Tax Benefits: A Case Study of 179D Deduction for a Hotel Portfolio

In the competitive world of the hospitality industry, savvy hotel owners are on the lookout for ways to improve their bottom line. An opportunity that has gained significant traction is the Section 179D tax deduction for energy-efficient commercial buildings. This case study shows how a hotel owner leveraged a lookback 179D study to unlock substantial tax savings across their portfolio.

For simplicity and privacy purposes, the names, locations have been anonymized and the deduction amounts have been rounded in the scenario below.

Background

Meet Alex Thompson, the owner of Sunburst Hospitality Group, a mid-sized hotel chain with 15 properties spread across the United States. Sunburst’s portfolio includes a mix of full-service hotels, limited-service properties, and extended-stay facilities, totaling approximately 1.5 million square feet of building space.

In early 2025, Alex heard about potential tax benefits from the 179D deduction and decided to learn how it could apply to his group of properties. Despite having made various energy-efficient upgrades over the years, Alex had not claimed the 179D deduction, because he was unaware of the opportunity for significant tax savings.

Lookback Study

After initial research, Alex found that Sunburst Hospitality Group could potentially claim deductions for the energy-efficient improvements they had made since 2006. He decided to conduct a comprehensive lookback study across the entire portfolio.

The Process

Step 1: Engaging Experts

Alex partnered with National Tax Group (NTG), a firm specializing in 179D deductions and energy tax incentives. The firm's expertise helped in navigating the complex requirements and documentation needed for the lookback study.

Step 2: Property Assessment

The NTG team began by conducting a thorough assessment of all 15 Sunburst properties:

• Review architectural plans and energy systems.
• Analyze past renovation and upgrade projects.
• Identify potential qualifying improvements.

Step 3: Energy Modeling

For each property, the NTG team used IRS-approved software to create energy models. These models compared the energy performance of the buildings to the ASHRAE (American Society of Heating, Refrigeration and Air Conditioning Engineers) standards for the respective years 2006 through 2025.

Step 4: Documentation and Certification

The National Tax Group team gathered and prepared all necessary documentation:

• Detailed descriptions of energy-efficient systems
• Energy consumption data
• Certification from qualified individuals

Step 5: Findings

The lookback study revealed significant opportunities for tax deductions across Sunburst's portfolio. Here's a breakdown of the findings of the Qualified Improvements.

Across the 15 properties:

• Lighting Systems: 12 of 15 properties had undergone lighting upgrades to energy-efficient LED systems since 2010.
• HVAC Upgrades: 8 of 15 properties had installed high-efficiency HVAC systems between 2012 and 2024.
• Building Envelope Improvements: 5 of 15 properties had enhanced insulation, energy-efficient windows, and cool roof systems installed between 2015 and 2023.
• Building Automation Systems: 3 of the properties, constructed after 2018, featured advanced building automation systems for optimal energy management.

Step 6: Calculation of Deductions

Based on the energy modeling results and square footage of improved areas, the eligible deductions for each property were calculated. The study revealed that Sunburst Hospitality Group was eligible for substantial deductions:

• Total Deductible Square Footage: 1,200,000 sq ft
• Average Deduction per Square Foot: $4.25
• Total 179D Deduction: $5,100,000

This total deduction was spread across multiple tax years, as improvements were made at different times across the portfolio.

Breakdown by Property Type

Challenges

The lookback study wasn't without challenges:

1. Documentation Gaps: For some older improvements, particularly those made before 2015, complete documentation was sometimes difficult to locate. The NTG team worked closely with Sunburst's facilities management to reconstruct records where possible.
2. Changing Standards: The ASHRAE standards, which form the basis for 179D qualification, had changed multiple times since 2006. This required careful analysis to ensure each improvement was compared to the correct baseline by year.
3. Partial Deductions: In some cases, improvements didn't meet the threshold for the full deduction but did qualify for partial deductions. This added complexity to the calculations.

Implementation

The lookback study in hand, Alex worked with Sunburst's tax advisors to amend previous years' tax returns. The process of claiming these deductions unfolded as follows:

1. Tax Return Amendments: Returns for tax years 2022-2024 were amended to include the 179D deductions.
2. Current Year Deductions: For improvements made in 2025, deductions were included in the current year's tax filing.
3. Future Planning: The study also identified opportunities for future improvements that could qualify for even higher deductions under the updated 179D rules.

Financial Impact

The total tax savings resulting from the current year and lookback 179D deductions had a significant impact on Sunburst Hospitality Group's financial position:

• Estimated Tax Savings: Approximately $1,700,000 (based on a 33% effective tax rate)
• Return on Investment: The cost of conducting the lookback study was less than 5% of the total tax savings, representing an excellent ROI

Additional Benefits

The lookback study provided benefits beyond immediate tax savings:

• Energy Cost Reduction: The energy-efficient improvements identified in the study contribute to energy savings, estimated at $750,000 annually across the portfolio.
• Increased Property Value: The documented energy efficiency improvements increased the overall value of Sunburst's properties.
• Competitive Advantage: The energy-efficient features aligned with growing consumer preferences for sustainable accommodations, potentially driving higher occupancy rates.
• Future Planning: The study provided a comprehensive overview of the energy efficiency status of each property, allowing for more strategic planning of future upgrades.

Lessons Learned and Best Practices

Alex's experience with the 179D lookback study yielded several key insights:

• Regular Reviews: Implementing a system for regular review of energy efficiency improvements and potential tax incentives will prevent missed opportunities in the future.
• Documentation is Key: Maintaining detailed records of all building improvements, including energy systems, is crucial for maximizing tax benefits.
• Expert Partnerships: Collaborating with experts in tax incentives and energy efficiency can uncover savings opportunities that might otherwise be overlooked.
• Holistic Approach: Considering both immediate tax benefits and long-term energy savings provides a more comprehensive view of the value of energy-efficient upgrades.

Future Strategy

Motivated by the learning and financial success of the lookback study, Alex developed a forward-looking strategy for Sunburst Hospitality Group:

• Planned Upgrades: A five-year plan was developed to upgrade the remaining properties to maximize future 179D deductions.
• Ongoing Monitoring: Implementation of a system to track and document all energy-related improvements across the portfolio.
• Annual Reviews: Scheduling annual reviews with tax and energy efficiency experts to ensure no future deductions are missed.
  Employee Training: Initiating a training program for facilities management staff to increase awareness of energy efficiency and related tax incentives.

Wrapping Up

The 179D lookback study proved to be a game-changer for Sunburst Hospitality Group. Not only did it result in substantial immediate tax savings, but it also paved the way for a more energy-efficient and financially optimized future. By taking advantage of this often-overlooked tax incentive, Alex transformed lost opportunities into significant financial gains.

This case study demonstrates the immense potential of the 179D deduction for hotel owners. It underscores the importance of staying informed about tax incentives and the value of partnering with experts to navigate complex tax landscapes. For the hospitality industry, where margins can be tight and competition fierce, such strategies can provide a crucial edge in achieving long-term success.

As the hospitality sector continues to evolve, with increasing emphasis on sustainability and energy efficiency, tools like the 179D deduction will likely play an even more significant role in shaping business strategies and investment decisions. Hotel owners who leverage these opportunities stand to gain not just in tax savings, but in operational efficiency, property value, and market positioning.