Improving Equitable Access to Energy-Efficient Commercial Building Tax Incentives

The Inflation Reduction Act (IRA) significantly updated several energy-related tax incentives for commercial buildings, with the aim to catalyze decarbonization. The 179D federal tax deduction for energy-efficient commercial buildings is the primary incentive. Two important IRA revisions to the 179D deduction are the creation of a new pathway for building retrofit projects to earn the deduction, and expanded eligibility for the deduction to most tax-exempt entities. These revisions offer substantial new pathways to scale energy efficiency in existing U.S. buildings and significantly reduce greenhouse gas emissions. However, hard-to-reach small businesses and nonprofits face barriers toward taking advantage of the 179D deduction that may limit the incentive's equitable impact on commercial building decarbonization. In this paper, we present a summary of the 179D deduction and its key updates through the IRA. The potential impact of the second pathway for retrofit projects is illustrated through simulated examples of building upgrade projects. We then present potential barriers that small businesses and nonprofits face to take advantage of the 179D deduction's expansions and discuss possible strategies for overcoming them. Insights into such barriers are built from structured interviews with building owners and managers and cost-benefit analyses of the 179D deduction's application process. Finally, the paper explores other energy-related federal tax incentives pertinent to commercial buildings, particularly energy investment tax credits, and how their implementation can compound with the 179D deduction for greater impact on an equitable energy transition in the United States.