An energy tax incentive called Section 179D was created under the Energy Policy Act of 2005 (EPAct). This incentive is a tax deduction for energy efficient commercial buildings. The IRS Code Section 179D allows for an immediate deduction of up to $1.80 per square foot for commercial buildings that achieve a 50% reduction in total energy and power costs. The subsystems that qualify for the deduction are the building envelope, HVAC, and interior lighting, and these changes must have been placed in service after 12/31/05 and before 1/1/14. Residential buildings are also included as long as they are taller than three stories. Even if the 50% threshold is not reached, a partial deduction is still available. A lighting provision is still awaiting final regulation from the IRS, but if this provision is put into effect, a business may qualify for a deduction from $.30 to $.60 per square foot based on reduction of lighting power density of 25% to 40% over Standard 90.1 – 2001. Businesses meeting this provision will still need certification to qualify for the deduction.
Who Can Qualify for This Tax Incentive?
Businesses seeking the 179D tax deduction should look for commercial property that would provide a good opportunity to take advantage of this incentive. Buildings that are 50,000 square feet or larger, industrial facilities, and chain facilities with multiple locations can be considered for the deduction. Buildings that are LEED certified, High Energy Star, rated buildings, and energy efficient retrofits are also excellent opportunities. Once a business has identified potential opportunities, they have a greater chance of maximizing the tax benefit with design changes.
The individual or company that makes the investment in the energy efficient building receives the incentive for privately owned buildings. This includes owners or landlords, tenants/lessees, Real Estate Investment Trust, or a Performance Contracting Company. Section 179D may also be allocated to designers, such as architects, engineers, or other professionals who create technical specifications that increase energy efficiency. The municipality has the discretion to allocate this tax deduction to the primary designer or among several designers.
How Can a Business Get Certified for This Tax Incentive?
Special certification is required to receive the benefits of Section 179D. A licensed engineer or contractor who is unrelated to the owner or designer must complete this certification. This licensed professional must be licensed in the jurisdiction where the building is located, and he/she cannot have been involved in the design of the building. Finally, he/she must present in writing to the taxpayer, meaning owner or designer, that he/she has the required qualifications to complete the certification and site visit. Once the site visit has taken place, the calculations will be completed using Department of Energy approved software. The taxpayer, meaning the owner or designer must obtain and retain the documentation and certification to claim the deduction, and the deduction must be taken in the year the new building was placed in service. However, a tax return can be amended if already filed. The final report, certification, and supporting documentation should be kept with the taxpayer’s records.
Owners of new construction in Dallas, Texas, were eligible for a tax deduction of nearly $1 million thanks to their installation of energy efficient lighting and building envelope design. The deduction went to the owners of the building since it was a privately owned commercial building. In another case study, the designer who installed energy efficient T8, T5 fixtures and made some HVAC upgrades in a school system in Missouri was able to claim a deduction of almost $1 million. The school system included 15 K-12 schools, with over 1.4 million square footage.