What is it?
The Energy Efficient Commercial Buildings Tax Deduction, included in Internal Revenue Code Section 179D, is commonly called the Commercial Building Deduction or the 179D deduction. Enacted as part of the Energy Policy Act of 2005, the provision encourages building owners to increase energy efficiency in new and remodeled buildings by providing an immediate tax deduction for costs incurred which increase the energy efficiency of a building. Those costs would otherwise be generally depreciated over 15, 27.5, or 39 years. Note, this is a deduction, not a credit.
How much is the deduction?
The maximum deduction is $1.80/square foot of building space. In order to achieve the maximum benefit, the building must achieve a reduction in energy cost of at least 50 percent in total annual energy and power costs, as compared to a “reference building” that meets the minimum standards of ASHRAE 90.1-2001 if placed in service prior to Jan. 1, 2016 (90.1-2007 if placed in service after Dec. 31, 2015). This standard sets minimum requirements for the energy-efficient design of new buildings so they may be constructed, operated, and maintained in a manner that minimizes energy use without constraining the building function or the comfort and productivity of the occupants. Since the deduction is based on the square footage, 179D is more beneficial to large buildings.
The energy savings are measured by reference to three main building system categories:
- Interior lighting
- Heating, cooling, ventilation, and hot water systems
- Building envelope
Additionally, a partial deduction is available of up to 60¢/square foot per system for buildings where the overall building does not meet the 50 percent energy savings threshold. In these instances, the individual systems for which the deduction is claimed must meet various reductions in energy usage.
What types of buildings qualify?
New construction of a commercial building of any size qualifies. New construction of residential rental buildings, such as apartments, qualify if they are four or more stories. Additionally, renovations and retrofits of existing structures are also eligible to receive the deduction. Buildings must be located in the United States.
Who may take the deduction?
The deduction is available to the owner of the building at the time it is constructed or when the renovation is made. Generally, the deduction belongs to the entity that is depreciating the energy-efficient property. However, for government-owned buildings, there is a special provision that allows the owner to allocate the deduction to the building’s “designer” (engineer, contractor, architect, environmental consultant, or energy services provider) for the taxable year in which the property is placed in service. This is a very attractive benefit to the building designer because it is essentially “found” money as the government is allocating a tax benefit to parties that provided services and did not incur any building construction costs.
When is the deduction available?
The deduction is available for buildings or renovations placed in service after Dec. 31, 2005, and before Jan. 1, 2017. The deduction is taken in the year in which the building is placed in service. For property placed in service in prior years and depending on the situation, a taxpayer may take the deduction on an amended return or possibly via a form 3115, Application for Change in Accounting Method.
How is the deduction calculated?
The energy savings must be certified by a qualified person, who is defined in Treasury guidance as an engineer or contractor who is licensed in the jurisdiction where the property is located and is unrelated to the party claiming the deduction. The certification is done using a software program that is approved by the IRS for making the 179D energy savings calculation. Therefore, the cost of this certification must be taken into account in determining the net benefit of the deduction.
For more information on this topic, or to learn how Baker Tilly construction specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.