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An immediate deduction is allowed for the cost of qualified energy-saving improvements to commercial building property in the U.S. (IRC Sec 179D). The maximum energy efficient commercial buildings deduction generally is limited to $1.80 per square foot on a lifetime basis and is available for energy efficient commercial building property placed in service after 2005 and before 2014.

The expenditures for energy reduction must reduce total annual energy and power costs with respect to the interior lighting, systems, heating, cooling, ventilation and hot water systems by 50%. Partial deductions are allowed in some cases. Certain standards must be met including, (1) an energy simulation is required to justify the deduction, (2) inspection and testing must be completed by a qualified engineer or contractor registered in the state.

Qualifying for the Section 179D Federal Energy Tax Deduction

How much is the deduction?

  • Maximum deduction$1.80 per square foot = 50% reduction in total annual energy and power costs as compared to a reference building that meets the minimum requirements of ASHRAE Standard 90.1-2001, but not greater than the cost of energy efficient commercial property placed in service during the taxable year.

  • Partial deduction – $.60 per square foot = 16 2/3% reduction for building envelope, HVAC and service hot water systems and lighting

  • Partial deduction - $.30 – .60 per square foot that qualifies as a 25% to 40% reduction in lighting power density (50% in the case of warehouses)

What qualifies?

  • Commercial buildings (any size)
  • Apartments, four or more stories, for lease
  • Commercial energy renovations

 Who qualifies for the deduction?

  • Building owner at the time of building improvements
  • A special rule allowing the allocation of a IRC Sec. 179D deduction with respect to energy efficient commercial building property installed on or in property owned by a federal, state, or local government to the person primarily responsible for designing the property. Since the government entity pays no income taxes the benefit of the deduction can then be passed on to the designing architect, engineer or building contractor.

What is the time frame for eligibility?

The building property must be completed or renovated after December 31, 2005 but before January 1, 2014.

What is needed from the builder?

  • Current full set of architectural plans includes all specifications
  • Energy compliance documents for lighting, HVAC, hot water systems and building envelope 
  • Computer software file used to generate T-24 documentation - preferably EnergyPro Software File
  • A contact person and phone number familiar with the project.

What do I get from a 179D review?

  • FTD certificate package – requires documentation for deduction
  • Provide review of existing T-24 or IECC to verify compliance with current code requirements
  • Review building lighting, HVAC and envelope systems for Federal Tax Deduction qualification
  • Contract for analysis and certification documentation

How do I claim the deduction?

  • The deduction is taken on the "Other Deductions” line of the taxpayer’s return
  • Tax returns may be amended going back three consecutive tax years

Reduction in Basis Required

If a deduction is allowed under IRC Sec. 179D, the basis of the energy efficient commercial building property is reduced by the amount of the deduction allowed. The reduction in basis is treated as amortization when applying the IRC Sec. 1245 recapture provisions on a subsequent disposition of the property. Similarly, the reduction in basis is treated as a depreciation adjustment when applying the IRC Sec. 1250 recapture provisions on a subsequent disposition of the property.

For more information about getting an energy certification contact Brent Ross.