Energy Efficient Commercial Building Tax Deduction

The Energy Policy Act of 2005 includes a tax deduction provided under IRC Section 179D of up to $1.80 per square foot for investments in “energy-efficient commercial building property” designed to significantly reduce heating, cooling, water heating, and interior lighting energy cost of newer or existing commercial buildings.  To be eligible, the energy-efficient commercial building property must be placed in service between January 1, 2006 and December 31, 2013.  

To qualify for the full deduction, a building owner or tenant must make investments designed to reduce energy costs by 50% or more.  A partial deduction of $0.60 per square foot is available for investments in one of three systems:  lighting; heating and cooling; or building envelope, designed to reduce energy costs by 16 2/3% (i.e. one-third of the 50% requirement).  Lighting may receive up to $0.30 to $0.60 deduction for reductions in lighting power density from American Society of Heating, Refrigeration and Air Conditioning Engineers (ASHRAE) 90.1-2001 baseline (as in effect April 2, 2003), which is a widely used industry standard.  Since a majority of states’ standard building codes are based on the subsequently developed ASHRAE 90-1-2004 or later iterations, virtually all buildings in these states will qualify for some or all of the deductions, even if built to only the minimum standards.  

To claim the 179D deduction, the taxpayer must obtain a certification with respect to the property by an independent licensed engineering firm using modeling guidelines promulgated by the U.S. Department of Energy.  The study, which must include a signed certification, is not attached to the taxpayer’s return but is instead maintained in the taxpayer’s file for future documentation in the case of an IRS inquiry or examination.   

Architects are eligible for the 179D deduction for the design of energy-efficient systems in new or existing public buildings owned by a Federal, state or local government and placed in to service after January 1, 2006.  Congress allows the deduction to be allocated to the “person primarily” responsible for designing the property in lieu of the public entity.  The deduction is particularly valuable, since no basis reduction is required by the Architect. 

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