New Tax Deduction for Constructing Energy Efficient Commercial Buildings
The Energy Tax Incentives Act of 2005 creates a brand-new deduction for expenses incurred for energy efficient commercial buildings. It's a major incentive for building owners to upgrade their systems and for those building new structures to design them in an energy-efficient manner. Importantly, the deduction is available whether the building is new or used.
New deduction. The maximum energy efficient commercial building (EECB) deduction is equal to (1) $1.80 per building square foot ($.60 per building square foot, for certain separate building systems), less (2) the aggregate amount of EECB deductions allowed for the building for prior years. It is important to note that there is no overall per-building dollar limitation on the EECB deduction.
Who gets the deduction? The EECB deduction generally may be claimed by the building owner. The deduction is expressed as an amount equal to the cost of EECB property placed in service during the taxable year.
An exception, however, applies for EECB property installed on or in property owned by a federal, state or local government (or political subdivision). Here, under regulations to be issued, the deduction will be allocated to "the person primarily responsible for designing the property in lieu of the owner of the property."
Qualifying for the maximum deduction. The new deduction is available only if the EECB property meets all of the following conditions:
- It is property that is otherwise depreciable or amortizable.
- It is installed on or in any building located in the U.S. that is within the scope of Standard 90.1-2001 of the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America (ASHRAE/IESNA).
- It is installed as part of (a) the interior lighting systems, (b) the heating, cooling, ventilation, and hot water systems, or (c) the building envelope.
- It is certified as being installed as part of a plan designed to reduce the total annual energy and power costs with respect to the interior lighting systems, heating, cooling, ventilation, and hot water systems of the building, by 50% or more in comparison to a reference building which meets the minimum requirements of Standard 90.1-2001 (as in effect on April 2, 2003). Detailed certification requirements must be met in order to qualify for the deduction, with IRS to promulgate regulations explaining how the fuel savings targets are to be measured.
Partial allowance of EECB deduction. In general, if a building does not meet the overall building requirement of a 50% energy savings, a partial deduction is allowed for each separate building system that comprises energy efficient property and which is certified by a qualified professional as meeting or exceeding the applicable system-specific savings targets established by IRS. These targets to be established by IRS are those that would result in a total annual energy savings with respect to the whole building of 50%, if each of the separate systems met the system specific target. The separate building systems are (1) the interior lighting system, (2) the heating, cooling, ventilation and hot water systems, and (3) the building envelope. The maximum allowable deduction is $.60 per square foot for each separate system.
Until IRS issues final regulations, the system-specific energy savings target for lighting systems is treated as met by a reduction in Lighting Power Density of 25% (50% in the case of a warehouse) of the minimum requirements in Table 9.3.1.1 or Table 9.3.1.2 (not including additional interior lighting power allowances) of ASHRAE/IESNA Standard 90.1-2001. Also, in the case of a lighting system of a non-warehouse building that does not reduce lighting power density by at least 40%, a prorated partial deduction is allowed. Certain lighting level and lighting control requirements must also be met in order to qualify for the partial lighting deductions.
As you can see, taxpayers that want to claim the new EECB deduction will require detailed input from building engineers and architects, as well as from their tax advisers.
Basis reduction. The basis of the commercial property is reduced by the amount of the EECB deduction.
Effective date. The new deduction for energy-efficient commercial buildings applies to property placed in service after Dec. 31, 2005, and before Jan.1, 2008.
The construction team at Clothier & Head hopes this information is helpful. If you would like more details about this or any other aspect of the new law, please do not hesitate to call 206-622-1326.
