Tax Alert - Energy Tax Deductions for Commercial Buildings

Date: July 12, 2010

Energy Tax Deductions for Commercial Buildings

If you own a commercial building or if you design buildings for the government, you may be eligible for government money through a tax deduction. Section 179D of the Internal Revenue Code will let you deduct the cost of energy efficient commercial building if the property was placed in service between January 1, 2006 and December 31, 2013. (Note: this is a tax deduction, not a tax credit. A tax deduction reduces the taxable income for the year while a tax credit is a dollar-for-dollar reduction in taxes owed.)

Why is there a deduction, and who can take it?

The Energy Policy Act of 2005, signed by President Bush, uses this tax deduction to give people an incentive to build energy efficient buildings. You can receive between $0.30 and $1.80 per square foot, depending on the type of energy systems installed and how efficient they are. The deduction applies to both new construction and existing buildings and is available in the year in which the energy-saving property was made ready for its intended use.

Architectural and engineering firms involved in the design of government buildings can also take advantage of significant tax savings benefits through Section 179D. Tax deductions are typically taken by building owners, but for government-owned projects, such as K-12 public school projects, the deduction can be allocated instead to the person primarily responsible for designing the property. (The government, of course, can't take advantage of a tax deduction.)

What kind of property qualifies?
As defined in the Internal Revenue Code, "energy efficient commercial building property" is property that is:

  • (a) installed on or in any building in the U.S. that is within the scope of Standard 90.1-2001, Energy Standard for Buildings Except Low-Rise Residential Buildings, of the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) and the Illuminating Engineering Society of North America (IES);
  • (b) installed as part of (i) the interior lighting systems, (ii) the heating, cooling, ventilation, and hot water systems, or (iii) the building envelope; and
  • (c) certified as being installed as part of a plan designed to reduce the total annual energy and power costs of interior lighting systems, heating, cooling, ventilation, and hot water systems of the building by 50% or more when compared to a reference building, which meets the minimum requirements of Standard 90.1-2001.

For taxpayers who qualify, the maximum deduction available to them is $1.80 per square foot, less the sum of Section 179D deductions allowed with respect to the building for all prior taxable years.

A property that doesn't meet the whole building requirement of 50% savings may still be eligible for the deduction on a sliding scale.

How much is the deduction?

The deduction ranges from $0.30 to $1.80 per square foot of improved building. If the property is "fully qualifying" with a 50% energy savings, the deduction equals the cost of the qualifying systems up to $1.80 per square foot of the gross floor area of the building.

If the building is "partially qualifying" (for interior lighting, HVAC, or building envelope), the deduction equals the cost of the qualifying system up to $.60 per square foot.

In addition, the interim lighting rule provides a tax deduction if the system provides a 25% (50% for warehouses) reduction in light power density. In such instances, the deduction equals the cost of the qualifying system up to $.60 per square foot on a sliding scale.

How do I get my building certified?

Before you can claim the deduction, the property must be certified by a properly qualified individual as an "energy-efficient commercial building property." The person who gives the certification cannot be related to the taxpayer and must be a properly licensed engineer or contractor. You don't need to attach the certification to your tax return, but you are required to maintain books and records that would satisfy the IRS if it investigates the deduction.