Energy Efficient Commercial Building Tax Deduction

As part of the Energy Policy Act of 2005, the Commercial Building Deduction encourages companies to “Go Green” to not only save money on their utility bills, but on their tax returns as well.

How it works

Commercial building owners can take a deduction of up to $1.80 per square foot of the building’s floor area if they install property that results in a reduction in energy and power costs. These installations need to be a part of the building’s interior lighting systems, heating, cooling, ventilation, hot water systems or building envelope.

To achieve the maximum $1.80 deduction, energy and power costs must be reduced by at least 50 percent when compared to a reference building. If a building comes in under 50 percent, it may still qualify for a deduction of $.60 per square foot if there is a decrease in costs of at least16 2/3 percent.

Special rule for government buildings

A federal, state or local governmental entity may assign the deduction to the person primarily responsible for designing the property, which may include an architect, engineer or contractor.

Examples of energy-efficient building materials and systems

• High-efficiency insulation in walls, ceilings and floors
• Automatic thermostats, lighting controls and other monitoring equipment
• Energy-efficient light fixtures
• Ultra-efficient air conditioners and furnaces
• High-performance glazing and other energy-efficient materials on the building envelope
• Natural ventilation
• Day-lighting
• On-site generation of electricity
• Improved fan efficiency

Claiming the deduction

• The building must meet energy and power costs reduction standards as detailed in Standard 90.1 – 2001, Energy Standard for Buildings Except Low-Rise Residential Buildings (effective April 2, 2003).
• Certification must be obtained to verify that the property installed satisfies specific energy efficiency requirements.
• Certification must be performed by a qualified individual and include a variety of statements regarding the energy savings.

How we can help

• Calculate the amount of the additional deduction
• Assist with calculation of tax basis and depreciation adjustments
• Coordinate with engineers to analyze and determine energy efficiencies, which may require a review of construction documents, site visits and discussions with architects, builders, and contractors
• Verify that the certification satisfies all IRS requirements necessary to support the additional deduction.