Energy Efficient Buildings Can Provide Insulation From Taxes
The Energy Policy Act of 2005 created more than $14 billion in tax breaks to promote energy production and conservation in the United States. One of these breaks is a tax deduction of up to $1.80 per square foot for commercial building owners or tenants who make their properties more energy efficient.
The Tax Relief and Health Care Act of 2006 extended the deduction through 2008. Property or improvements placed in service between January 1, 2006 and December 31, 2008, qualify.
Generating Tax Savings
The energy-efficient commercial buildings (EECB) deduction is available for buildings in the U.S. that are covered by Standard 90.1-2001 of the American Society of Heating, Refrigerating and the Air-Conditioning Engineers (ASHRAE) and the Illuminating Engineering Society of North America (IESNA). This means most commercial buildings, including multifamily residential structures of four or more stories above grade are eligible. Generally, the deduction goes to the person or organization that bears the expense of construction (usually the owner but, in some cases, a tenant).
To qualify for the EECB deduction, you must install “energy-efficient commercial building property” – such as a state-of-the-art lightning or HVAC system – in a new or existing building. You’ll also need a certification from a licensed engineer or contractor stating that these improvements are part of a plan designed to reduce annual energy and power costs by at least 50% in comparison to a reference building that is located in the same climate zone and meets the minimum requirements of ASHRAE/IESNA Standard 90.1-2001.
In June 2006, the IRS published Notice 2006-52, which provides interim guidance on the deduction until final regulations come out. Among other things, the notice prescribes guidelines regarding the content of the certification and the certifier’s qualifications. It also provides for a public list of approved software products for calculating energy and power consumption and costs. You can find the list on the U.S. Department of Energy’s Website at www.eere.energy.gov/buildings/tools_directory.
When measuring energy savings, you may consider reductions in the cost of only heating, cooling, ventilation, water heating and interior lightning. Reductions in other energy costs – such as refrigeration, cooking, elevators and certain manufacturing or business processes – are not taken into account.
Conserving Your Energy
To achieve energy-savings targets. Improvements, must otherwise be depreciable and must be installed as part of an eligible building’s:
- Interior lightning system, Heating, cooling, ventilation and hot water systems, or Building envelope (for example, insulation, exterior windows and doors, and certain metal roofs).
The Energy Policy Act also authorizes a partial deduction of up to $0.60 per square foot for improvements to any one of these systems that meet energy-savings targets established by the IRS. Notice 2006-52 allows the partial deduction for improvements that reduce total energy use by at lease 16 2/3 % (one-third of the 50% target for the full deduction).
In addition, the IRS Notice provides and alternative interim target for interior lightning systems. Upgrades that reduce lightning power by specified amounts and meet certain other requirements entitle you to a partial deduction between $0.30 and $0.60 per square foot.
Plugging In the Numbers
The best reasons for making your building more energy efficient are to protect the environment and reduce your operating expenses. But the EECB deduction provides another powerful incentive to make the investment.
To determine whether there are opportunities for improvement, you’ll need to assess the energy performance of an existing or planned building. The federal government’s Energy Star program provides free tools you can use to make an initial assessment. (See www.energystar.gov/benchmark.) You’ll also want to estimate the cost of retrofitting an existing building or upgrading the design of a planned structure to meet the EECB deduction’s energy-savings target.
Keep in mind that the deduction is limited to the actual cost of EECB property, up to a cap of $1.80 per square foot for the full deduction. Costs in excess of the cap are depreciated over 39 years (27 ½ years for residential buildings). Here’s an example:
Wayne owns a 50,000-square foot office building. After consulting with a lightning engineer, he learns that installing a new interior lightning system can reduce his annual cost of 40,000 dollars. He deducts $30,000 on his 2007 income tax return (50,000 x $0.60), and depreciates the remaining $10,000 over 39 years.
Stepping On The Gas
Currently, the EECB deduction is set to expire at the end of this year. If you wish to take advantage of this incentive, you’ll need to start planning for it right away. Check with you tax advisor to monitor the status of final regulations and proposals to extend the deduction.
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