§179D Energy Efficiency Tax Deduction
During the past several years, key tax incentives were signed into law in an attempt to encourage business owners to incorporate energy efficiency in their operations. The Energy Policy Act of 2005 included an incentive called the EPAct §179D Tax Deduction.
Section179D establishes a deduction for expenses incurred for energy-efficient construction or retrofit. If your company owns or leases commercial buildings, including certain residential buildings, you may be eligible to deduct part or all of the costs associated with the installation or retrofit. This opportunity allows a business to immediately expense costs that would otherwise be capitalized and recovered through depreciation over 27.5 or 39 years.
The incentive is specifically for lighting, HVAC and hot water systems, and building envelope.
§179D provides a deduction of up to $1.80 per square foot of building area for the installation of systems that reduce the total energy and power costs of the entire building by 50 percent or more when compared with a reference building. Partial deductions are allowed for separate building systems that are certified by a qualified professional as meeting or exceeding the applicable system savings targets established by federal government. For partial deductions, the requirement for the building envelope is a 10% improvement. For HVAC/hot water systems, the improvement must be 15% and lighting must reach a 25% percent threshold.
The deduction is available for new construction and existing buildings as well as for tenant-owned improvements, and rental apartment buildings that are four stories or more. An analysis is required to determine if a building qualifies.
The provision is effective for property placed in service after December 31, 2005, and before January 1, 2017. Taxpayers may go back and claim the deduction in prior open tax years by amending the tax return.
Since government-owned buildings aren’t subject to tax, they are not eligible for the deduction. However, the deduction can be allocated to the primary designer of a government-owned building. The designer can include an architect, engineer, contractor, environmental consultant, or energy services provider who creates the technical specifications for a new building, or an addition to an existing building, that incorporates EPAct §179D property. In a case where there is both a designer and architect, the deduction may be split.