Included in Internal Revenue Code (“IRC”) Section 179D is the Energy Efficient Commercial Buildings Deduction, or as it is commonly called the 179D Deduction, not to be confused with IRC Section 179, expensing for Small Businesses. Congress included IRC Section 179D to encourage the private and public sectors to build energy-efficient buildings. The Tax Increase Prevention Act signed by the President on December 19, 2014 extended IRC Section 179D to include projects placed in service by December 31, 2014.
IRC Section 179D provides a tax deduction to building owners who surpassed industry standards for energy efficiency in new construction and renovations. The tax deduction is based on the costs incurred to increase the energy efficiency of the building. Normally these costs would be capitalized and depreciated over 27.5 or 39 years. The maximum amount that can be deducted for a particular building is $1.80 per square foot.
In order to qualify as costs pertaining to “energy-efficient commercial building property” several criteria must be met.
First, the costs must be associated with depreciable property that is installed in a domestic building that is within the scope of Standard 90.1-2001. Standard 90.1-2001 is a publication of the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America. The Standard provides minimum requirements for the design of energy efficient buildings.
Second, the property must be installed as part of: (1) the interior lighting system, (2) the heating, cooling, ventilation and hot water systems, or (3) the building envelope. The building envelope includes everything that separates the interior of the building from the outdoor environment including the windows, walls, foundation, basement slab, ceiling, roof system and insulation.
Third, the property must be installed pursuant to a plan intended to reduce the total annual energy and power costs of the building (with respect to interior lighting, heating, cooling, ventilation and hot water supply systems) by 50 percent or more in comparison to a reference building that meets the minimum requirements of Standard 90-.1-2001 and such a plan must be certified by the IRS.
In order to qualify for the full deduction, the overall cost reduction plan must target all the interior lighting, heating, cooling, ventilation and hot water supply systems. The targeted reduction applies to the overall energy savings, not the savings of any particular system. To be certified by the IRS, the energy savings must be certified by an engineer or contractor who is licensed in the jurisdiction where the property is located and is unrelated to the taxpayer.
A reduced deduction may be available with respect to a building even if the relevant energyefficient property is not installed as part of a certified plan to reduce overall energy and power costs. The partial deduction is available for the costs of the energy-efficient system installed up to $0.60 per square foot of the building. These system-specific improvements must also be certified by an independent engineer or contractor.
An important part of IRC Section 179D is that it also encourages federal, state, and local governments (and affiliated entities such as a public school) to build energy-efficient buildings as well. Since governments would not benefit from a tax deduction, a provision included in Section 179D enables to government entity to transfer the tax deduction to the designer of the building. Building designers include engineers, contractors, and architects.
If you think you have a property that qualifies for the IRC Section 179D deduction or you have any questions, please contact Brendan Logan, CPA, MBA, tax partner with Castellano Korenberg &Co., CPA’s. Castellano, Korenberg & Co., CPA’s, P.C.
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