The benefits of constructing energy-efficient commercial buildings are not just environmental. For business owners and designers, the 2005 Energy Policy Act (EPA) created Section 179D which allows a substantial federal tax deduction for the costs of installing certain energy-efficient systems in commercial buildings.
The amount of the deduction varies from $0.30 to $1.80 per square foot of the building, up to the total costs of the energy-efficient property placed in service. The deduction is specifically for costs of improving the energy efficiency of existing commercial buildings or designing high efficiency into new buildings. Once that limit has been reached, whether in one tax year or over several years, there is no deduction for additional energy-efficient expenses on that building. The deduction is claimed in the tax year the property is placed in service. This specifically applies to commercial properties designed to significantly reduce heating, cooling, water heating, and interior lighting energy costs.
Ideal candidates for these deductions are newly constructed buildings with at least 50,000 sq ft, renovation projects (particularly lighting retrofits), and regional or national chains that feature multiple locations.
Certification Requirements for Energy-Efficient Commercial Buildings
The energy-efficient property must be certified to meet technical standards for energy and power cost reduction. A business owner must have a qualified firm perform a field inspection of the building. They then must use qualified software from the Treasury Department’s list of certified software to calculate the energy savings. The results need to be certified by a qualified individual.
The deduction also can apply to architects or engineers who design buildings. Under a 2008 IRS Notice, the 179D deduction for a government-owned building (federal, state and local) can be allocated to the designer of the building. A designer is defined as the person who creates the technical specifications for installation of the energy-efficient property and may include architects, engineers or contractors. A person that merely installs, repairs, or maintains the property is not a designer.
Because government entities cannot take advantage of this tax deduction, the Internal Revenue Service (IRS) adopted a provision that allows government entities and public institutions to allocate the applicable tax deduction to the designer of the building. This could provide significant tax benefits to a design firm that has government clients owning “green” building projects, including public universities and grade schools.
The benefit works as a permanent deduction since the designer does not have to reduce the basis of the property. The amount of the deduction depends on the energy-efficient property installed and the calculated reduction in energy usage. The designer must obtain a signed allocation letter from the municipal building representative in order to claim deduction.
If more than one designer is responsible for creating the technical specifications for installation of qualified energy-efficient commercial building property (or partially qualifying commercial building property for which a deduction is allowed under §179D) on or in a government-owned building, the owner of the building shall:
- Determine which designer is primarily responsible and allocate the full deduction to that designer, or
- At the owner’s discretion, allocate the deduction among several designers.
The energy-efficient deduction for business owners and designers is available only for property placed in service after December 31, 2005 and before January 1, 2014.
If you are planning to renovate or construct a commercial building, then with a little tax planning the savings could be significant. For more information, contact us at Anna Coldwell at [email protected] or 312.670.7444.