What is the Energy Efficient Commercial Building Tax Deduction?
The 179D Energy Efficient Commercial Buildings Tax Deduction, included in Internal Revenue Code Section 179D and commonly known as the Commercial Building Deduction or the 179D deduction, provides a tax deduction for businesses, architects, engineers and contractors when they build or renovate a building that is energy efficient.
What types of buildings qualify for the deduction?
- New construction of commercial building of any size
- New construction of residential rental buildings that are at least four stories
- Renovations and retrofits of existing structures
Buildings or renovations placed in service after December 31, 2005 and before January 1, 2017 may qualify. For those buildings placed in service prior to 2005 and depending on specific circumstances, a taxpayer may possibly take the deduction on an amended return or via form 3115, Application for Change in Accounting Method.
All buildings must be located in the United States.
Who receives the deduction?
The owner of the qualified building at the time it is constructed or when the renovation is conducted may take the deduction. In general, the deduction belongs to the entity that is depreciating the energy-efficient property. For government-owned buildings, the owner of the building is allowed to allocate the deduction to the building’s “designer”, being the engineer, contractor, architect, environmental consultant, or energy services provider, for the taxable year in which the property is placed in service.
How much money could I save?
The maximum deduction is $1.80 per square ft. To achieve the maximum benefit, the building must provide at least a 50% reduction in total annual energy and power costs which meets the standards of ASHRAE 90.1 – 2007. This standard sets minimum requirements for the energy-efficient design of new buildings so they may be constructed, operated and maintained in a way that decreases energy use without restricting the building function or the contentment and productivity of the residents.
A partial deduction is available for up to 60 cents/square foot per system for buildings where the overall building does not satisfy the 50% energy savings margin. The individual systems for which the deduction is claimed must meet various reductions in energy usage.
How are the energy savings measured?
The energy savings are measured by reference to the following categories:
- Interior lighting
- Heating, cooling, ventilation and hot water systems
- Building envelope
How can I calculate the deduction?
The energy savings must be certified by a qualified person, who is defined in Treasury guidance as a contractor or engineer who is licensed in the jurisdiction where the property is located and is unrelated to the party claiming the deduction. A software program approved by the IRS for making the 179D energy savings calculations must be used for the certification.
To discuss this deduction further, please contact a Texas R&D Tax Credit Solutions specialist.