Energizing Tax Benefits
Maximize deductions through building improvements.
response to the growing focus on energy conservation, Congress passed the
Energy Policy Act of 2005 or EPAct, which created tax incentives to encourage
the construction and retrofitting of energy-efficient buildings. Although
initially scheduled to sunset after two years, the law has been extended
several times and now provides certain incentives through 2013 that offer some
significant benefits to commercial property owners.
common provision in EPAct is the Energy Efficient Commercial Buildings
Deduction. This deduction, which is also referred to as the Section 179D
deduction, allows a property owner to claim an immediate tax deduction of up to
$1.80 per square foot for energy-efficient improvements to a building’s envelope or its lighting, hot water, and
heating, ventilation, and air conditioning systems.
building qualifies for the full deduction if the energy-efficient improvements
are installed as part of a plan to reduce the building’s total annual energy and power costs by 50
percent when measured against a reference building located in the same climate
zone that meets the minimum requirements of American Society of Heating, Refrigeration
and Air Conditioning Engineers or ASHRAE Standard 90.1-2001. The 50 percent
reduction must come solely from the energy-efficient improvements. Reductions
that result from other improvements are not considered for the purposes of
calculating the deduction.
improvements do not result in an overall 50 percent energy savings over the
reference building, a partial deduction may be available for energy-efficient
improvements in each of the building’s systems that result in energy cost savings of 16.6 percent. The
partial deduction equals up to 60 cents per square foot for each qualifying
qualify for the deduction, the improvements must meet certain standards. First,
the improvements must be depreciable property. Second, the improvements must be
made to a building that is located in the U.S. and within the scope of ASHRAE
Standard 90.1-2001. Third, the improvements must be made to one of the building
systems discussed above. Finally, the improvements and energy savings must be
inspected and certified by a qualified contractor or engineer.
EPAct provision is the New Energy Efficient Home Credit (IRC Section 45L),
which provides a tax credit of up to $2,000 for each energy-efficient dwelling
unit constructed by an eligible contractor. This credit is also available for
qualifying multifamily housing units of three stories or less (IRS Notice
the New Energy Efficient Home Credit expired at the end of 2011. However, it is
also important to consider buildings completed in prior years, since owners may
still have an opportunity to claim tax credits missed in prior years by
amending previously filed tax returns for each year a property became eligible
for the credit. The federal statute of limitations for filing an amended income
tax return is three years, which would generally allow amended returns to be
filed as far back as 2008. Credits that cannot be fully utilized during the tax
year may be carried back one year or forward for up to 20 years until fully
for Solar Energy
also contained incentives for solar energy, which have been extended and
broadened since its original passage. Under current law, the Energy Credit (IRC
Section 48) is equal to 30 percent of the cost of qualifying solar property
placed in service before January 1, 2017, and is allowed for both regular and
alternative minimum tax purposes.
solar property includes two primary categories: solar photo voltaic, which is
used to generate electricity, and solar thermal, which is used to heat water.
the cost of solar energy property has been coming down, the initial
expenditures can still be high. In addition to the Energy Credit discussed
above and cash incentives offered by many utility companies, there are other ways a property owner
can offset some of the costs associated with a solar investment. For tax
solar property has a relatively short life. However, under the current, “bonus depreciation” rules, the property owner may be able to
deduct 50 percent to 100 percent of the cost of the solar property in the
initial year, depending on when the property was placed in service. The
property owner also has the opportunity to sell any unused electricity back to
the utility company at market rates, thereby potentially generating revenue
from the property.
Congress enacted EPAct in 2005, the idea was to encourage energy efficiency by
providing property owners federal incentives for incorporating energy
efficiency designs into their buildings. Many state and local tax incentives
also exist. If you have built a new property or made significant
energy-efficient improvements to your property during the last three years,
talk to your tax adviser to see what tax benefits may be available to you.
F. Becker Jr., CPA, is a tax partner in the Tampa, Fla., office of Cherry,
Bekaert & Holland. Contact him at firstname.lastname@example.org.
Institute strongly advocates for energy-efficiency incentives such as tax
deductions versus federal government mandates. View CCIM’s Energy Statement of Policy.