High energy costs, an unprecedented level of government mandates for green building, heightened demand for green construction, and improvements and better pricing for environmentally sustainable materials have prompted many building owners, architects, and facility managers to consider conservation driven updates to save cash. Sec. 179D of the IRS Code provides a significant deduction for the cost of energy efficient improvements to commercial property. This deduction could help mitigate the average 3% to 7% cost difference in building green.
If your company owns or leases commercial buildings and you have installed or retrofitted the property to be more energy efficient, you may be eligible for a deduction for part or all of the costs associated with the installation or retrofit. In other words, instead of capitalizing and recovering through depreciation over 27.5 years or 39 years this allows for potential immediate expensing of costs.
The maximum deduction is $1.80 per square foot of building floor area that qualifies under IRC Sec. 179D measured against the reference building. The deduction is allowed for prior tax years, including 2006 and 2007, and can include multiple taxpayers. Multiple taxpayers are limited to allocating the $1.80 among the taxpayers.
And if your building does not qualify for the full deduction, it could qualify for a partial deduction. If your building does not meet the 50% energy savings, it could still qualify for 60¢ per square foot deduction if certified to reduce energy costs by at least 16.66%.
If you have constructed a new commercial building or reconstructed an existing commercial building and placed the building into service after December 31, 2005 or will place it into service by January 1, 2009 you may be eligible for a deduction. If your building has been or is in the process of becoming LEED Gold or Platinum-certified, you’re nearly assured the deduction. And if you haven’t already taken advantage of the deduction, your return can be amended for up to three years.
To qualify for a full or partial deduction, the energy efficient commercial building property must meet the following criteria:
- The building must be located in the United States.
- Installation as part of interior lighting systems, HVAC, and hot water systems or the building envelope (insulation, exterior doors, exterior windows, roofing material).
- Certified that installation will reduce total annual energy and power costs by 50% or more as compared to Std. 90.1-2001 American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) Reference Building.
- Energy and power consumption calculation based on IRS-approved software programs that compare the subject facility to an ASHRAE Reference Building.
- The property must be certified by an IRS-qualified professional engineer or contractor licensed in the same jurisdiction as the proposed building.
The person or organization that makes the expenditures for construction is generally the recipient of the allowed tax deductions. This is usually the facility owner, but for some HVAC or lighting efficiency projects, it could be the occupant. For government owned structures, the building or system designer may take the deduction.
If the property is a federal, state, or local government or a political subdivision, the owner of the property may allocate the section 179D deduction to the person primarily responsible for designing the property. For example, a designer may include the architect, engineer, contractor, environmental consultant or energy services provider.
Before a taxpayer can claim the section deduction, the taxpayer must obtain a certification (not to be confused with LEED certification) with respect to the property. The certification must be provided by a qualified individual and satisfy the requirements of section 179D(c)(1).
The qualified individual must be properly licensed as a professional engineer or contractor in the jurisdiction in which the building is located, not be “related” to the taxpayer taking the deduction (as defined by the IRS), and represent to the taxpayer in writing that he or she has the requisite qualifications to provide the certification.
The certifier must also use IRS-qualified computer software. Software must be on a list of products approved by the U.S. Department of Energy. SourceCorp can provide your Green Building Tax Deduction Certification/Analysis.