The Section 179D tax deduction, an incentive for energy-efficient commercial buildings, has changed with the passage of the Inflation Reduction Act. One of the most notable changes is the concept of a "Qualified Retrofit Plan," which opens up opportunities for existing buildings to benefit from the 179D tax incentive. This article delves into the details of Qualified Retrofit Plans and their role in the expanded Section 179D deduction.
A Qualified Retrofit Plan is an element of the alternative deduction pathway for energy-efficient building retrofits under Section 179D. It is defined as a written plan prepared by a qualified professional that outlines specific modifications to a building, which are expected to reduce the building's energy use intensity (EUI) by at least 25% compared to its baseline.
The introduction of Qualified Retrofit Plans represents a significant shift in the Section 179D deduction, particularly for existing buildings. This new pathway addresses some of the limitations of the previous version of the deduction and expands eligibility for older buildings that may not have been able to meet the earlier, more stringent requirements.
Under the previous rules, many older buildings struggled to qualify for the Section 179D deduction because they couldn't meet the 50% energy savings threshold compared to ASHRAE Standard 90.1. The new alternative deduction pathway, which utilizes Qualified Retrofit Plans, makes it easier for these buildings to become eligible by:
This change represents a new opportunity for many existing buildings with energy-efficient retrofits to qualify for the Section 179D deduction.
When using a Qualified Retrofit Plan, the deduction is calculated differently from the standard Section 179D pathway. The amount of the deduction is the lesser of:
This calculation method ensures that the deduction is directly tied to the actual improvements made and the resulting energy savings.
The process of implementing a Qualified Retrofit Plan involves several key steps:
A qualified professional must certify the energy use intensity of the building as of any date during the 1-year period ending on the date when the property installed pursuant to the plan is placed in service. This establishes the baseline against which energy savings will be measured.
The qualified professional must certify that the property installed as part of the retrofit meets the requirements of being considered energy-efficient building retrofit property.
As of any date more than one year after the retrofit property is placed in service, the qualified professional must provide a "qualifying final certification." This certification must confirm that the building's energy use intensity has been reduced by at least 25% compared to the baseline.
Unlike the standard Section 179D deduction, which is typically taken when the property is placed in service, the deduction for retrofits under a Qualified Retrofit Plan is allowed one year later, upon the completion of the final certification.
The introduction of Qualified Retrofit Plans offers several advantages for building owners and investors:
By allowing buildings to use their own pre-retrofit energy usage as a baseline, the new rules provide more flexibility for older buildings that may not meet contemporary energy standards.
The maximum deduction under Section 179D has increased significantly, from $1.88 to up to $5.81 per square foot as of 2025. This increase makes the deduction more attractive for building owners considering energy-efficient retrofits.
Unlike the previous lifetime limitation on Section 179D deductions for a specific building, the new rules allow for periodic benefits. The deduction can be claimed every three years (or four years for tax-exempt entities) as long as the retrofit results in the required energy savings.
For buildings subject to local energy efficiency requirements, such as DC's Building Energy Performance Standards (BEPS), the Qualified Retrofit Plan aligns closely with these programs, potentially allowing building owners to claim tax deductions while pursuing compliance with local regulations.
While Qualified Retrofit Plans offer significant opportunities, there are also challenges and considerations to keep in mind:
The new rules add complexity to the Section 179D deduction process. Building owners and their tax advisors need to carefully navigate the requirements to ensure compliance and maximize benefits.
The need for a qualified professional to prepare the plan and provide certifications means that building owners will need to engage with architects or engineers with expertise in energy-efficient building design.
The delay in claiming the deduction until after the final certification (at least one year after the retrofit is completed) requires careful planning and potentially impacts cash flow considerations for building owners.
Proper documentation is crucial for claiming the Section 179D deduction using a Qualified Retrofit Plan. Building owners must maintain detailed records of the plan, certifications, and energy usage data.
As of 2025, the industry is still awaiting specific guidance from the IRS on how retrofit projects must be certified and how the amount of energy savings should be calculated under the new rules. This forthcoming guidance may further refine the requirements and processes for Qualified Retrofit Plans.
For building owners and investors, Qualified Retrofit Plans offer a pathway to substantial tax savings while also improving the energy efficiency of their properties. However, the complexity of the new rules and the need for professional expertise underscore the importance of careful planning and execution.
Qualified Retrofit Plans represent a significant evolution in the Section 179D tax deduction, opening up new opportunities for existing buildings to benefit from energy-efficient improvements. Lowering the energy savings threshold and allowing buildings to use their own baseline for comparison make the deduction more accessible to a wider range of properties.