Financing Focus

Energizing Tax Benefits

Maximize deductions through building improvements.

In 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.

EPAct Deduction

The most 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.

A 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.

If the 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 system.

To 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 Credit

Another 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 2008-35).

Unfortunately 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 utilized.

Incentives for Solar Energy

EPAct 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.

Commercial solar property includes two primary categories: solar photo voltaic, which is used to generate electricity, and solar thermal, which is used to heat water.

Although 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 depreciation ­purposes, 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.

When 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.

William F. Becker Jr., CPA, is a tax partner in the Tampa, Fla., office of Cherry, Bekaert & Holland. Contact him at bbecker@cbh.com.

CCIM Institute strongly advocates for energy-efficiency incentives such as tax credits and deductions versus federal government mandates. View CCIM’s Energy Statement of Policy.

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