179D Energy Efficient Commercial Building Deduction

BACKGROUND

The §179D Energy Efficient Commercial Building Deduction is a Federal tax incentive designed to promote taxpayers to construct energy efficient buildings as well as encourage building owners to make improvements to existing structures that reduce energy and power costs. As an added inducement, architects, engineers, contractors, environmental consultants or energy services providers may also be eligible for the incentive on public projects.

This incentive is often referred to as the EPAct Deduction after the Energy Policy Act of 2005, which created it, or as the §179D Deduction, which relates to the Internal Revenue Code section that codified it.

HOW IT WORKS

Commercial building owners can take a Federal tax deduction of up to $1.80 per square foot of the building’s floor area if they install property that reduces energy and power costs. These installations need to be a part of the building’s interior lighting systems, heating, cooling, ventilation, hot water systems or building envelope. The deduction is allowed for both new construction and remodeling and the building must be placed in service on or after January 1, 2006.

To achieve the maximum $1.80 deduction, energy and power costs must be reduced by at least 50 percent when compared to a reference building. If a building comes in under 50 percent, it may still qualify for a deduction of $.60 or $1.20 per square foot by looking at individual systems.

Examples of energy-efficient building materials and systems include:

• Lighting Improvements
• LED Lighting Technology
• Automatic Lighting Controls such as Occupancy and Photo Sensors
• Bi-Level Switching
• Daylighting
• HVAC and Hot Water Improvements
• Efficient Air Conditioning Units and Furnaces
• Automatic Thermostats and Control Sensors
• Chilled Beam Systems
• Demand Control Ventilation
• Energy Recovery Ventilation
• Evaporative Cooling
• Geothermal Heating and Cooling Systems
• High Efficiency Boilers and Chillers
• Improved Fan Efficiency
• Natural Ventilation
• Variable Refrigerant Flow Systems
• Building Envelope Improvements
• Energy-Efficient Windows and Glazing
• Added Insulation in Walls and Roofs

SPECIAL RULE FOR “DESIGNERS” OF GOVERNMENT BUILDINGS

A special rule allows a governmental entity to assign the deduction to the person primarily responsible for designing the building, such as architects or engineers. Similarly, the deduction may be assigned to contractors for designing and choosing efficiency upgrades, such as lighting and HVAC systems. Thus, if you are involved in the design of a community center, public educational facility, municipal parking garage, or other government building, you may qualify for the deduction.

CLAIMING THE §179D DEDUCTION

• The §179D Deduction is available to both new construction and remodeling of commercial buildings performed on or after January 1, 2006.
• The building must meet certain energy and power costs reductions when compared to the ASHRAE standard that was in existence 2 years prior to the start of construction (90.1-2007 for buildings completed during 2016 through 2020, 90.1-2002 prior to 2016), Energy Standard for Buildings Except Low-Rise Residential Buildings (effective April 2, 2003).
• An independent, qualified individual must verify and certify that the property installed satisfies specific energy efficiency requirements using IRS-approved software.

HOW WE CAN HELP

• Calculate the amount of the additional §179D Deduction
• Coordinate with your tax preparer to claim the deduction
• Seek assignment of deduction from government agency, if required
• Amend tax returns or file a change in method of accounting, if necessary
• Certify the energy efficiencies, which may require:
• Review of construction documents;
• Site visits; and
• Discussions with building designers, project managers and related personnel.

CASE STUDY

A design/build company had numerous LEED certified projects and performed other energy efficiency retrofits for dozens of government-owned projects, including the construction of a classroom building for a public university and the installation of energy efficient lighting in city-owned parking garages. The deductions amounted to over $500,000 in immediate after-tax cash savings.