Increased Deductions for Energy-Efficient Buildings

Energy-efficiency deductions are an excellent opportunity to lower taxes right now. Section 179D and other legislation provide a financial incentive—up to $1.80 per square foot— to taxpayers that improve the efficiency of their commercial buildings above certain thresholds.

What Constitutes Eligibility?

The deduction applies to improvements that exceed the building energy code standards established by the American Society of Heating, Refrigerating, and Air- Conditioning Engineers (ASHRAE) by at least 50% (Standards 90.1-2001 and, beginning in 2016, 90.1-2007).

Improvements in energy efficiency made between January 1, 2006, and December 31, 2017, are eligible. Benefits can still be captured on a look-back basis.

The provision applies to reduced energy costs in three areas:

  • Building envelope
  • Heating, cooling, ventilation, and hot water systems (HVAC)
  • Interior lighting systems

The following taxpayers are eligible to claim the deduction:

  • Owners and tenants of commercial properties that have built, retrofitted, or installed leasehold improvements
  • Architects, engineers, and contractors who are the primary designers on government-owned energy efficient buildings

What Are the Benefits?

Maximum deduction is $1.80 per square foot for a 50% reduction in total annual energy and power costs with respect to the combined usage of all three systems.

Partial deduction is $0.60 per square foot, per system, for reductions of energy consumption through the independent use of the interior lighting, HVAC, or envelope.

Lighting only is $0.30 to $0.60 per square foot, based on the reduction in lighting power density (lighting watts per square foot) when compared to the ASHRAE reference building.

The deduction is calculated based on the square footage of these improvements.

Process

A licensed contractor or professional engineer must model the energy performance of the building and compare it to a reference building that meets the minimum energy and power cost requirements under the ASHRAE standards. After this analysis, a certification is issued to claim the deduction.

What About Past Improvements?

Many taxpayers aren’t familiar with the benefit of a Section 179D study and haven’t taken advantage of the deduction in prior years—but it’s not too late to claim the benefits.

Taxpayers that own energy-efficient building components can go back and claim missed deductions using an accounting method change filed with their current-year tax return. It’s not necessary to amend previous returns.

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