Energy Tax Credits (Section 179D) – Commercial Buildings

What is it?

The Energy Policy Act of 2005 (Public Law 109-58), signed by President Bush, created a tax deduction for constructing energy efficient buildings.  The expiration of this tax deduction was extended to December 31, 2013 by the Emergency Economic Stabilization Act of 2008.  The Section 179D tax deduction created is between $0.30 and $1.80 per square foot depending on the type of systems installed.

What Property Qualifies?

The full tax deduction is available to owners of both new and existing commercial buildings in which the installation of interior lighting system, HVAC system, building envelope, and service hot water systems reduce the total annual building power and energy costs by 50% or more compared to ASHRAE 90.1-2001 minimum requirements. 

A partially qualifying property will be able to receive a portion of the tax deduction as long as one of the systems saves at least 16 2/3% in energy and power costs.

What Tax Deduction is Available?

First it is important to note that this is a tax deduction and not a tax credit.  A tax deduction reduces the taxable income for the year while a tax credit is a dollar for dollar reduction in taxes owed.  The Section 179D tax deduction available ranges from $0.30 to $1.80 per square foot of improved building.  If the property is a fully qualifying property with a 50% energy savings, the available deduction is the cost of the qualifying systems up to $1.80 per square foot.

If the building contains a partially qualifying property for interior lighting, HVAC, or building envelope, the deduction available is the cost of the qualifying system up to $.60 per square foot. 

In addition, the interim lighting rule provides a tax deduction if the system provides a 25% (50% for warehouses) reduction in light power density.  The tax deduction available is the cost of the qualifying system up to $.60 per square foot on a sliding scale.

Where can I find the IRS Notice 2006-52?

The IRS issued Notice 2006-52 with an amplification of this with Notice 2008-40.  Please use the following links to these notices:

IRS Notice 2006-52 http://www.irs.gov/irb/2006-26_IRB/ar11.html
IRS Notice 2008-40 http://www.irs.gov/irb/2008-14_IRB/ar12.html

How do I determine if my Property Qualifies?

In order to determine if your property fully or partially qualifies, a qualified individual must conduct a  Performance Rating Method (PRM) and then provide a certification for the property.  This process includes utilizing a qualified software program as well as a site visit.

Who is a Qualified Individual?

According to the IRS, a qualified individual is (1) not related to the taxpayer (within the meaning of Section 45(e)(4), (2) is an engineer or contractor that is properly licensed as a professional engineer or contractor, and (3) has represented in writing to the taxpayer that he has the requisite qualifications.

What is CCC’s Process?

Our process includes two phases:
Phase 1
(1) Gather necessary information (construction drawings, type of systems, equipment specifications, etc.)
(2) Perform analysis of the building components
(3) Provide initial report of qualifying property

Phase 2 (if qualifying property exists)
(1) Perform site visit to confirm building construction
(2) Perform mini-energy audit
(3) Provide final report of qualifying property

What do I do with the Report?

The final report will need to be supplied to your accountant so that he/she may include the information on your return.  The report will not need to be attached to your return but you must maintain records to prove entitlement to the tax deduction.

Why CCC?

CCC has a long history of meeting our clients’ needs ranging from Cost Segregation, Construction Audit/Consulting, and Lease Audits.  In addition to our engineers and affiliates having the required experience and licenses to perform the certifications, we will provide a free mini energy audit during the site visit of Phase 2.  Our professional engineer will review with you some energy saving opportunities that may exist in your building.  These savings can be achieved by simply changing a light bulb’s wattage to replacing an entire HVAC system.