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Commercial Building Owners Can Take A Federal Tax Deduction Of Up To $1.80 A Square Foot

Commercial Building Owners Can Take A Federal Tax Deduction Of Up To $1.80 A Square Foot

As enacted in The Energy Policy Act of 2005 (hereinafter “EPAct”), the I.R.C. § 179D Energy Tax Deduction for building envelope efficiency encourages building owners to “Build Green” to not only save money by reducing their utility bills on a carry-forward basis, but to also reduce their tax liability on their tax returns as well.

As a synopsis of I.R.C. § 179D, commercial building owners can take a federal-level tax deduction of up to $1.80 per square foot of the building’s envelope if they install property that reduces energy and power costs. These installations need to be a part of the building’s interior lighting systems (i.e., up to .60 per square foot); Heating, Ventilation, and Air Conditioning systems (hereinafter “HVAC”; i.e., .60 per square foot for newly installed HVAC equipment); or building envelope (i.e., .60 cents per square foot for windows, doors, roofs or insulation). The deduction is allowed for both new construction and remodeling and the building must be placed in service between 2006 through 2013.

To further elaborate upon the building’s interior lighting systems discussed above, I.R.C. § 179D offers an accelerated tax deduction equal to the complete cost of installing energy-efficient interior lighting, capped at $0.30 to $0.60 per square foot proportional to Lighting Power Density reduction levels of 25% to 40%.

In order to achieve the maximum $1.80 per square foot under the I.R.C. § 179D energy tax deduction for building envelope efficiency, 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. Additionally, there are special rules for lighting-only projects applicable to both new construction and retrofits, which use a graduated scale. The standards for the reference building are somewhat dated and the thresholds can often be met through current design techniques.

The I.R.C. § 179D energy tax incentive can significantly reduce a commercial building owner’s perceived costs for the renovations and should certainly be considered when planning an energy efficient renovation project. In addition, it should be duly noted that many states now offer energy based tax incentives which can be utilized in conjunction with the federal-level incentives to further reduce the expenditures of a building owner’s energy efficient renovation project.