Green Tax Relief

The Energy Policy Act of 2005 (26 U.S.C. § 179D) created a tax incentive to improve energy efficiency of commercial buildings (this tax incentive was extended through 2013 as part of the Emergency Economic Stabilization Act of 2008, a/k/a "The Banking Bailout"). The "Commercial Building Tax Deduction" established a tax deduction for expenses incurred for energy efficient building expenditures made by the building owner. The deduction is equal to energy-efficient commercial building expenditures made by the taxpayer, subject to a cap of $1.80 per square foot.

The tax credit applies to "energy efficient commercial building property." But what exactly does that term mean? It means property–

1) for which depreciation is allowable;
2) installed on or in any building in the US and within the scope of ASHRAE Standard 90.1-2001;
3) which is installed as part of the interior lighting systems; the heating, cooling, ventilation, and hot water systems; or the building envelope; and
4) which is certified as being installed as part of a plan designed to reduce the total annual energy and power costs with respect to the aforementioned building systems by 50% or more (in comparison to a reference building which meets the minimum requirements of ASHRAE .Standard 90.1-2001.

Certification requirements must be met to qualify for these deductions. The secretary of the treasury, in consultation with the secretary of the secretary of energy, provided guidance in Notice 2006-52 that describes methods of calculating and verifying energy and power costs, using qualified computer software based on provisions of the 2005 California Nonresidential Alternative Calculation Method Approval Manual and the 2005 California Residential Alternative Method Approval Manual. Inspections must be performed by engineers or licensed contractors, and they must meet the guidelines of the National Renewable Energy Laboratory.

Partial deductions are available for buildings that do not meet the whole building requirement of 50% energy savings. The deduction is allowed with respect to each separate building system that comprises the energy-efficient property. For these "component deductions," the requirements are as follows: 20% savings for interior lighting, 20% savings for HVAC and hot water, and 10% savings for building envelope. The maximum allowable deduction for the separate systems is $.60 per square foot.

Other notable features about the Commercial Building Tax Deduction:

• Churches are not eligible for the deduction.
• Portions of buildings (e.g. common areas, portions of common areas, etc.) can be retrofitted and the associated square footage considered for the deduction.
• Screw-in compact fluorescent lamps (CFLs) cannot be used to reduce wattage for purposes of the deduction. ASHRAE 90.1-2001 lighting power calculations require maximum labeled wattage of incandescent luminaire be used.

Anyone who has even considered designing or constructing a "green" building knows that the associated costs are much higher than a traditional build. However, the Commercial Building Tax Deduction at least mitigates some of that cost and makes it a little easier to be green.