Tax
| Build deductions with energy-efficient improvements |
| Published Wednesday, April 22, 2009 8:45 am |
The focus on energy
The Energy Policy Act of 2005 (EPACT) created new tax incentives for installing or constructing energy-saving improvements in commercial buildings. Specifically, Section 1331 (the Commercial Building Tax Deduction), establishes a tax deduction for expenses related to the design and installation of energy-efficient commercial building systems. Under the EPACT, commercial building owners or leaseholders can claim a deduction for all or part of the cost of energy-efficient improvements placed in service after 2005 and before 2008. The American Recovery & Reinvestment Act of 2009 extended this provision through December 31, 2013.
The new focus on energy-efficiency not only encourages property owners to build energy-efficient real estate properties and motivates them to reduce energy consumption, but also helps to keep emerging wind, solar and geothermal industries in business. There are additional energy-related provisions, incentives and credits that have been extended. Please click here for details.
What is the commercial building deduction?
Commercial building owners or leaseholders may qualify for the tax deduction by making their buildings energy-efficient. The commercial building deduction allows taxpayers to deduct the cost of energy-efficient property installed in commercial buildings. It includes property that is part of a building's interior lighting, heating, cooling, ventilation and hot water systems as well as the building envelope.
Section 1331 provides that a building owner may claim a tax deduction for expenditures made as part of a building designed to reduce the total annual energy used in the operation of the building. The deductible amount can be as much as $1.80 per square foot of building floor area for buildings that achieve at least 50% energy savings. For example, if no prior deductions have been claimed, the deduction for a 100,000 square foot building is $180,000 ($1.80 times 100,000). Buildings below the 50% threshold might qualify for a deduction of up to 60 cents per square foot of building floor area.
The 50% energy savings must be accomplished solely through energy and power consumption reductions for the heating, cooling, ventilation, hot water, and interior lighting systems. Reductions in any other energy uses/sources are not taken into account for this tax deduction.
The deduction is allowed during the taxable year in which the property is placed in service (e.g. when it is ready for its intended use), between January 1, 2006 and December 31, 2013.
What types of buildings and expenses qualify?
The IRS guidelines say that a qualified building cannot be a single-family home, a multifamily structure of three stories or fewer above grade, or a mobile or modular home. In addition, the improvement must be installed as part of the interior lighting systems, heating, cooling, ventilation and hot water systems, or building envelope.
Section 1331 of H.R. 6 provides that energy-efficient commercial building property is defined as property that is:
- Installed on or in any building located in the United States 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 and the Illuminating Engineering Society of North America;
- Installed as part of (a) the interior lighting systems, (b) the heating, cooling, ventilation, and hot water systems, or (c) the building envelope; and
- 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 percent or more when compared to a reference building, which meets the minimum requirements of Standard 90.1-2001 (which came into effect on April 2, 2003).
Claiming the Section 179D deduction
There is no special form necessary to claim the energy-efficient commercial building deduction. However, as part of the deduction requirement, a building owner must obtain certification from a qualified independent licensed engineering firm that the improvement(s) will reduce the total annual energy and power costs by 50% or more (162/3% for the reduced deduction). Very specific calculation methods must be utilized by the certifying organization.
There are five alternative ways a building may qualify (after certification), as follows:
- The whole building may qualify for up to $1.80 per square foot; or
- Lighting systems; or
- HVAC/water heating; or
- Building envelope may each qualify for up to a $0.60 per square foot deduction for their contribution to the 50 percent savings (defined by the Internal Revenue Service as 16 2/3% whole buildings savings); or
- Lighting may receive an up to a $0.30 to $0.60 deduction for reductions in lighting power density from ASHRAE 90.1-2001 tabular values of 25 percent to 40 percent respectively, with linear interpolation between 25 and 40 percent.
Public entities may qualify, too
The EPACT also allows the deduction to be allocated to the "person primarily responsible" for designing the property in lieu of the public entity (i.e., public school). The Section 179D deduction also benefits the contractors, architects or engineers who are primarily responsible for the energy-efficient design of public buildings.
Getting your improvements certified
If you are not sure that your certification has been calculated correctly, or if you would like a referral to a reputable, licensed and qualified organization for certification, please contact us. Our resources can help you get energy-tax-certified in order to become eligible for deductions. Contact us for an introduction that could get you up to $1.80/sq. ft. in federal energy tax deductions.
As energy prices continue to escalate, the timing of the extension of the Energy Policy Act could not be better for property owners and investors constructing new properties. Take advantage of substantial tax benefits which will, in turn, promote a reduction in energy consumption and contribute to a more green community.
Call us today. We can help.
Jeffrey A. Bolton, CPA is a co-founder, Partner, and member of the firm's Executive Committee. He works closely with our Tax & Entrepreneurial Services and Strategic Business Solutions groups. As an experienced CPA, Jeff provides expertise in entrepreneurship, tax and accounting. His practice primarily services family-owned, emerging and high-growth companies. Jeff's focus is helping business owners achieve success through the implementation of profit enhancement, expense reduction, asset protection and business process solutions. Contact him directly via email at jbolton (at) daszkalbolton.com or by phone at 561.886.5292.
Send this page to a friend
(C) Copyright Daszkal Bolton LLP (2009). All Rights Reserved.
CIRCULAR 230 DISCLOSURE
To ensure compliance with requirements imposed by the United States Treasury Department, you are hereby informed that any advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. This advice may not be forwarded without our express written consent. For more information about the Circular 230 disclosure, please click here.
