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Tax Deduction for Energy Efficient Commercial Buildings
If your clients own, or are lessees of, a commercial building and install property as part of the commercial building’s interior lighting systems, heating, cooling, ventilation, and hot water systems, or building envelope, they may benefit from the availability of substantial tax deductions.
Additionally, in the case of energy efficient commercial building property (or partially qualifying commercial building property for which a deduction is allowed under § 179D) that is installed on or in property owned by a Federal, State, or local government or a political subdivision thereof, the owner of the property may allocate the § 179D deduction to the person primarily responsible for designing the property (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 energy efficient commercial building property).
American cities are going green and local leaders are charging ahead with innovative sustainability policies. More and more, Green Building city ordinances are requiring that all new construction and building improvements meet certain energy, water, roofing, and lighting efficiency thresholds. For instance, the city of Dallas recently and unanimously voted to implement numerous Green Building regulations. Commercial buildings with less than 50,000 square feet will be required to be 15% more energy efficient and use 20% less water. Buildings with more than 50,000 square feet will be required to meet strict LEED (Leadership in Energy and Environmental Design) standards. Dallas' Green Building ordinances most likely will serve as a model for cities across the nation.
In April 2008, Los Angeles passed a new green initiative. In a unanimous vote, the City Council passed an ordinance requiring builders of large commercial and residential developments to adopt such measures as planting drought-resistant landscaping and using recycled materials and energy-efficient heating, cooling and lighting. The law requires new commercial buildings and high-rise residential structures with more than 50,000 square feet of floor space to meet a nationally recognized LEED (Leadership in Energy and Environmental Design) standard, developed by the U.S. Green Building Council, a Washington-based nonprofit. It also would cover major renovations and low-rise developments of 50 units or more.
However the deduction is only applicable to building systems installed before January 1, 2009 so it is important to take advantage of this deduction before its expiration.
Background:
On August 8, 2005, President Bush signed H.R. 6, The Energy Policy Act of 2005 (Public Law 109-58) into law. This legislation created a new tax incentive for constructing energy efficient commercial buildings. Specifically, Section 1331, the Commercial Building Tax Deduction, establishes a tax deduction for expenses related to the design and installation of energy-efficient commercial building systems. Please note that the tax deduction is not a tax credit (an amount directly subtracted from the tax owed), but a deduction –an amount subtracted from gross taxable income. Tax deductions result in benefits to the taxpayer; thus this newly created program can be used as an incentive to urge clients to choose energy efficient building systems. As noted, the deduction is only applicable to building systems installed before January 1, 2009 so it is important to take advantage of this deduction before its expiration.
Green Building Services: § 179D Certification & Property Analysis
Before a taxpayer may claim the § 179D deduction with respect to property installed on or in a commercial building, the taxpayer must obtain a certification. The certification must be provided by an engineer or contractor that is properly licensed as a professional engineer or contractor in the jurisdiction in which the building is located and satisfy the requirements of § 179D(c)(1).
SourceCorp provides Green Building certification that the property satisfies the energy efficiency requirements of § 179D. PLEASE NOTE: the certification process for Code section 179D only determines whether the deduction is available. The certification process does not involve determining the cost of the qualifying energy efficient property.
Green Building Study Approach:
First, your client needs to provide detailed specifications for the building. In some situations, due to the applicable local building codes or industry building standards, a thorough review may not be necessary to move forward to with a section 179D study. For example, LEED Gold-certified buildings generally would not require a review of the building specifications to determine if it qualified for the deduction because the building almost invariably would meet the energy savings targets. In this situation, SourceCorp would only review the specifications during the actual study.
After preliminary review of the specifications, we determine whether the building would qualify in whole or in part. A professional engineer would perform the energy modeling and analysis and our professionals would schedule a site visit. The energy modeling may not occur until after the site visit depending on the level of detail available in the plans. Detail is frequently lacking in situations where the taxpayer acted as its own general contractor. Regardless, during the site visit, our engineer would follow the NREL standard guides and checklists to verify that the property meets the energy savings targets and gather any additional information not included in the plans.
We then finalize the section 179D study and provide the building owner with an overview of the energy saving features.
After we provide the certification of the qualifying energy efficient property, our cost segregation personnel become involved in the process. As noted, the certification process for Code section 179D only determines whether the deduction is available. The certification process does not involve determining the cost of the qualifying energy efficient property. Our cost segregation personnel:
Our cost segregation personnel determine the cost basis of the qualifying property and determine the applicable cap on the deduction. For the full deduction, the cap is $1.80 times the building’s square footage. For the partial deduction, the cap is reduced to $0.60 times the building’s square footage. If all of the qualifying property’s cost bases are less than the cap, they are deducted in full. If their cost exceeds the cap, their pro-rata basis up to the cap is deducted and the remaining basis is depreciated as appropriate.
Where possible, the engineer that performs the site visit will also be able to perform the cost segregation analysis of the building. In some situations, the engineer may work in tandem with another cost segregation consultant on larger or unusual properties. After finalizing the cost segregation report, we will ship a hardcopy of the cost segregation report and the section 179D study to your client.
Audit Support:
Under our standard agreement, we provide 40 hours of audit support. We anticipate that the section 179D study will involve a minimal level of audit support because we can provide the agent with the study and discuss any questions the agent might have. As necessary, we would file a Form 8821 to be able to discuss the study with the agent. If the combined section 179D study and cost segregation report require additional audit support, we can file a Form 2848 and work with you on providing the best audit defense for your client.
Because the Code section 179D deduction applies to new buildings that meet certain energy savings targets and requires the involvement of licensed engineers or contractors, you may not have known where to turn to for help with this new deduction. The SourceCorp Green Building Service team is comprised of qualified, full-time, highly experienced and licensed 179D professionals. We can help maximize deductions and limit exposure.
For more information on providing your clients with Green Building 179D Certification and Tax Deductions, to schedule a Green Building CPE Presentation, or to receive a free copy of SourceCorp’s Green Building 179D Tax Deduction Overview please visit:
http://sourcecorptax.com/contact/contact_srcp.htm
