Obama’s Better Buildings Initiative – Will 179D Deduction Become a Tax Credit for Energy Efficient Buildings?

On February 4, 2011, In 179D Deduction, Energy Efficient Tax Deductions, Energy Policy Act of 2005, Tax Benefits for Business and Property Owners, Tax Deductions for Architects

By John Cummings.

President Obama’s State of the Union address laid out a comprehensive energy roadmap that includes proposing new efforts to improve energy efficiency in commercial buildings across the country. According to the report, the “Better Buildings Initiative,” outlined today at Penn State University, will achieve a 20 percent improvement over the next decade, saving companies and business owners tens of billions of dollars a year.

Perhaps the most exciting among the proposed changes is the set of new tax incentives for commercial building efficiency. Specifically, the President is calling on Congress to redesign the current tax deduction for commercial building upgrades, transforming the current deduction to a tax credit that is more generous and that will encourage building owners and real estate investment trusts (REITs) to retrofit their properties. These changes could result in a ten-fold increase in commercial retrofit take up, leveraging job- creating investments.

For building owners and designers of government buildings who take this tax benefit in place of the government owner, this will be quite a welcome change if instituted. The current 179D tax deduction is quite valuable already but as a tax deduction creates a number of limiting factors because the deduction affects building cost basis and requires income tax timing.

That results in some expenditures that are made in compliance with the statute, unable to benefit the intended tax payer. Turning the deduction into a credit would make it available regardless of these factors and widely available as a credit in the “current” year when applicable or as a refund sought by way of an amendment to a tax return.

The other exciting promise is to make this more widely available to REIT’s a result of the changes. Currently, the tax structure of the ownership in REIT’s and the way distributions are planned, has made the 179D deduction and other incentives, widely unusable. Considering the massive number of commercial buildings held in REIT’s that are in need of renovation or upgrade and using enormous amounts of energy in the meantime, this is a welcome prospect for many building owners.

According to the White House, immediate response has been overwhelmingly positive. They’ve listed a number of the comments received or made publicly and I’m including a handful here:

Rick Fedrizzi, CEO and Founding Chair, U.S. Green Building Council

“For all of those committed to the idea that green buildings can create jobs, save energy and save money, this is a great day, and the entire green building movement is incredibly grateful for President Obama’s leadership in this critical step forward for America. It is major steps like these that are necessary to address the challenges facing our environment. We know that green buildings can and should be front and center of any credible jobs creation program. The jobs supported by the green building industry can’t be outsourced, and they are jobs that frequently can build on skills learned in the manufacturing sector… With the incentives the President has outlined, we are confident that these organizations are ready to take green building to unprecedented scale.”

Mayor Michael Bloomberg, New York City, NY

“President Obama’s energy efficiency agenda is ambitious, his plan will spur improvements that pay for themselves through lower utility bills and help clean the environment, and I look forward to working with him on it. The Better Buildings Program recognizes the critical role that cities play in fostering energy efficiency and I hope that it will inspire and empower local governments to create innovative programs to save energy and money.”

Eileen Lee, Vice President of Energy and Environment, National Multi Housing Council (NMHC) and the National Apartment Association (NAA)

“We commend the Obama Administration for its focus on energy efficiency in commercial properties, including apartments, and for taking an incentive-based approach to achieving meaningful reductions in our building energy usage…We support the President’s plan to reform the existing Section 179(d) building efficiency tax incentive, which has largely gone unclaimed by property owners for many reasons. Changing the deduction to a more generous tax credit and creating more incentives for owners to undertake costly retrofits on existing properties are welcome changes. The President’s plan would also wisely ensure that Real Estate Investment Trusts (REITs) can take advantage of the credit…The President’s plan will help advance the rental housing industry’s sustainability efforts to the next level by attracting more investments in building efficiency.”

Clark Manus, President, American Institute of Architects

“We applaud the President’s ‘Better Buildings’ initiative, which mirrors directly what the AIA has been advocating. As a profession, architects are already helping make the President’s goals a reality. Because of their leadership role in the built environment, architects are in an ideal position to help implement the President’s initiative. In order to reach the President’s ‘Better Buildings’ goals, there is a crucial need for design experts to apply their experience, innovations and talents to current practices so that one of the major sources of energy use – the building in which we work – can be addressed…As the President said today, the United States can ‘out-build’ the rest of the world. And architects are the catalysts for winning that contest.”

Jason Hartke, Vice President of National Policy, U.S. Green Building Council

“The 5 million+ commercial buildings and the 120 million existing homes in the U.S. today are, by and large, squandering away precious energy and resources. With policies like the one introduced by the President today, our homes, hospitals, schools and offices can be turned into structures that will lessen our dependence on fossil fuel, increasing national security. This also frees up those wasted dollars for growth in the private sector and for groceries in America’s households. We are laser-focused in doing what we can to move this important initiative forward as fast as possible.”

As always, the challenge will be in the execution. Fortunately, the American Recovery and Reinvestment Act, which has largely carried forward and continued to fund the initiatives that began under President Bush in the Energy Policy Act of 2005, has continued to carry the torch. Although the devil is in the details, it would appear that the bold new energy policy initiatives have a good chance of coming to pass. Stay tuned.

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