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IRA Update: IRS Announces Updated Reference Standard For Energy Efficient Commercial Building Property Deduction Under Section 179D – Tax Authorities

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On Friday, December 23, 2022, the IRS published Announcement 2023-1, 2023-1 IRB 1 (the
Announcement”), which sets forth a new
reference standard for energy efficient commercial building
(“EECB”) property for purposes of the
deduction under Section 179D1 and clarifies the
application of the existing reference standard following changes
made by the Inflation Reduction Act of 2022
(“IRA”). The Announcement is effective
January 1, 2023.

In general, Section 179D allows taxpayers that own or lease
commercial buildings in the United States to deduct a portion of
the cost of EECB property placed in service during the taxable
year. Property with respect to which depreciation (or amortization
in lieu of depreciation) is allowable is EECB property if it is
certified to be installed to provide efficiency upgrades to one or
more of three of the building’s systems: (1) interior lighting
systems, (2) heating, cooling, ventilation, and hot water systems,
and (3) the building’s envelope. Certification involves
establishing, in the manner and method prescribed by the Secretary
of Treasury (the “Secretary”), that the
property is installed as part of a plan designed to reduce the
total annual energy and power costs of the interior lighting,
heating, cooling, ventilation, and hot water systems by 25 percent
(50 percent for taxable years beginning before January 1, 2023) or
more in comparison to a reference building that meets the minimum
requirements of the applicable Reference Standard 90.1 published by
the American Society of Heating, Refrigerating, and Air
Conditioning Engineers and the Illuminating Engineering Society of
North America (referred to herein as an “ASHRAE
Reference Standard
“) using certain methods of

The Announcement notifies taxpayers that the Secretary has
affirmed ASHRAE Reference Standard 90.1-2019 as the applicable
reference standard for purposes of Section 179D for EECB property
placed in service after December 31, 2026, other than EECB property
for which construction started before January 1, 2023. Existing
ASHRAE Reference Standard 90.1-2007 will apply to EECB property
placed in service before January 1, 2027, and any EECB property for
which construction started before January 1, 2023 (regardless of
when placed in service).

The applicable reference standard is determined based on the
definition of “Reference Standard 90.1” in Section
179D(c)(2). Prior to the IRA, Reference Standard 90.1 was defined
to mean the most recently published Standard 90.1 that was affirmed
by the Secretary for use under Section 179D not later than two
years prior to starting construction of the EECB property. The IRA
revised the definition, effective for taxable years beginning after
2022, to mean the more recent of (i) ASHRAE Reference Standard
90.1-2007 or (ii) the most recently published Reference Standard
90.1 that was affirmed by the Secretary, after consultation with
the Secretary of Energy, for use under Section 179D not later than
four years before the property is placed in service. The Secretary
affirms ASHRAE Reference Standard 90.1-2019 for purposes of Section
179D(c)(2) pursuant to the Announcement, following the Department
of Energy’s approval of this reference standard on July 28,

The Announcement also states that the IRS and Treasury
Department intend to publish separate guidance to address other
changes to Section 179D made by the IRA, including procedures for
measuring energy use intensity to calculate the alternative
deduction for energy efficient building retrofit property.

We will continue to monitor guidance issued on the changes made
to the Code by the IRA and provide updates.


1. Unless otherwise stated, capitalized references to
“Section” are to the Internal Revenue Code of 1986, as
amended (the “Code”).

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