Are you aware that you can save hundreds of thousands of dollars for energy-efficient commercial buildings? The Energy-Efficient Commercial Buildings Tax Deduction (179D) offers tax deductions for energy efficiency in assets including HVAC, building envelope and lighting. Here are some commonly asked questions with answers that will help you understand how the tax credit may benefit you.
What are the Benefits of the 179D Tax Credit?
Section 179D allows qualified building owners and other businesses to receive an up to $1.80 per square foot tax deduction for a 50% reduction in total annual energy consumption and power costs in comparison to a standard building code from 2007. Often, buildings are certified in the 60,000- to 120,000-square foot range, resulting in benefits of between $100,000 and $200,000 per building.
A partial deduction of $0.60 per square foot can be taken for reduction of energy consumption through the building envelope, HVAC and lighting. Additionally, a partial deduction from $0.30 to $0.60 per square foot can be taken for a 25-40% reduction in lighting power density (50% for warehouses).
What are the Qualifications for the 179D Tax Deduction?
To take advantage of this benefit, your building or renovation has to go into service (use) after January 1, 2006, and it has to be energy-efficient. That means that your new building or the renovations must be designed to use at least 50% less energy than baselines established in ASHRAE Standard 90.1-2001. Projects after 2016 must meet the ASHRAE 90.1-2007 standards. The energy efficiency standard is simple to state but describing the process of how it is proven is complicated and best left to experts in the field.
The property must be for personal use, and it must be located within the U.S.
Who Qualifies for 179D Tax Deduction?
Building owners and lessees who make eligible energy-efficient improvements to commercial buildings can qualify. Commercial building can include retail and industrial buildings, warehouses and apartment buildings that are at least four stories.
- Property owners: If you own a commercial building that was built (or substantially renovated) after January 1, 2006, you've got a property that may be a candidate.
- Commercial tenants: If you own assets, such as the HVAC or lighting being depreciated, you may be a candidate.
- Architects/Engineers/Designers: If you are responsible for the design of a building or renovation owned by a government entity, you may be entitled to a large tax deduction. Government-owned building can include schools, libraries, airports and military bases, among others.
How Long Will the 179D Tax Deduction Last?
The 179D Energy-efficient Commercial Buildings Deduction is available through December 1, 2020. This bill also makes this tax incentive retroactive to January 1, 2018. Congress typically considers the extension of the tax deduction as part of an extenders bill, though there have been lapses in the past. It is important to act now to take advantage of this valuable tax deduction.
How Can I Take Advantage of the 179D Tax Deduction?
The IRS requires that there be a third-party verification of the existence of the building and that it is built to the specifications that were modeled for energy efficiency. To obtain the benefits of the 179D tax deduction, you must obtain the certification of that licensed third party. Additionally, the certifying party must use approved software and demonstrate that the building's envelope (walls, roof, and windows), lighting and HVAC systems are designed to use at least 50% less energy than the 2001 ASHRAE 90.1 standard.
Projects after 2017 must meet the ASHRAE 90.1-2007 standards. This is a standard set forth by the American Society of Heating, Refrigerating and Air-Conditioning Engineers, and the software modeling is used to create two models. One model is the building as designed, and the other is the building if designed pursuant to the 2001 standard. The models are compared to see if your building makes the grade. If it does, you can qualify for up to $1.80 per square foot in deductions.
When Should You Claim the 179D Tax Deduction?
The tax deduction is taken in the year in which the property is placed in service or opens for business. This is typically the date of a temporary certificate of occupancy but it can vary.
What is the Cost to Be Certified?
Generally, a study can be done at a cost that equates to less than 10% of the amount of your tax deduction or less. Beware of companies that get paid on a contingency. You may be overpaying, and the IRS may question the independence of the study. Companies that charge a set fee by the square foot will not raise this red flag.
Engineered Tax Services has provided thousands of Energy Policy Act tax certifications since 2005. Handling over 100 certifications every month, we have perfected the process by working closely with the IRS. Our precise documentation meets and exceeds the standards required by the Department of Energy and the IRS and has consistently withstood the toughest scrutiny.
To learn more about how ETS is helping clients take advantage of valuable energy-based tax benefits or to request detailed information, contact us at 800.236.6519 or visit our 179D page for more information.