“Going Green” The Section 179D Federal Energy Tax Deduction: An Article Authored by Robert D’Andrea from KLR - Accounting Firm Boston, Massachusetts, Providence, Rhode Island

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“Going Green” The Section 179D Federal Energy Tax Deduction

posted Mar 9, 2016 by Robert D’Andrea

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There have been many incentives enacted over the last several years that have encouraged businesses to consider energy efficiency into their operational plans.  One in particular relates to the design and construction of energy-efficient commercial building property. The program is woefully underutilized because most taxpayers do not know it exists.

The program is intended to offset some of the costs of qualifying energy-efficient improvements to commercial buildings; the deduction allows taxpayers to take an immediate expense for the cost of property.  The cost of the property would normally be recovered through depreciation over as many as 39 years.

What are the requirements of Section 179D? 

To qualify, energy-efficient improvements must reduce total annual energy and power costs with respect to the interior lighting, heating, cooling, ventilation and hot water systems by 50%.  Partial deductions are allowed.  Energy simulation is required to justify the deduction; and inspection and testing must be completed by a qualified engineer or contractor registered in the jurisdiction.

Below is a list of questions and answers that will hopefully shed some “light” on the program.

How much of a deduction is allowed?

  • Maximum deduction is $1.80 per square foot for a 50% reduction in total annual energy and power costs not to exceed the amount equal to the cost of energy-efficient commercial building property placed in service during the taxable year.
  • Partial deduction is 60 cents per square foot for a 25-40% reduction in lighting power density (50% in the case of warehouses).

What qualifies?

The Energy-Efficient Commercial Building Deduction is available to building owners and lessees who make energy efficient improvements to their commercial buildings (any size) including:

  • Retail buidings
  • Office buildings
  • Industrial buildings
  • Apartments, four or more stories, for lease
  • Warehouses

Who qualifies?

  • Building owners  (at the time of the building improvements) and lessees who make every efficient improvements to their commercial buildings. 
  • Designer of government buildings – the owner may allocate the deduction to the designer, engineer, contractor, architect, environmental consultant or energy services provider for the taxable year that includes the date on which the property is placed in service for new government buildings or renovations/retrofits/additions or existing government buildings such as:
    • Schools
    • State Universities
    • Libraries
    • Town halls
    • Airports 
    • Post offices
    • Military bases and others

What is the timeframe during which the work must be completed?

  • Units must be completed or renovated after December 31, 2005 and before December 31, 2016.

What do I need from the builder?

  • Current full set of architectural plans that include all specifications.
  • Energy compliance documents for lighting, HVAC and envelope (Title24 or IECC).
  • EnergyPro File – computer file used to generate T-24 documentation.
  • A contact person and phone number.

What do I get from a 179D review?

  • FTD certificate package- requires documentation for deduction.
  • Provide review of existing T-24 or IECC to verify compliance with current code requirements.
  • Review building lighting, HVAC and envelope systems for Federal Tax Deduction qualification.
  • Contract for analysis and certification documentation.

How do I claim the deduction?

  • The deduction is taken on the “Other Deductions” line of the taxpayer’s return.

Tax returns may be amended going back three consecutive tax years

  • The current trends to make commercial buildings more energy efficient is not a passing fad.  Federal, state and local taxing authorities are likely to continue offering financial incentives to taxpayers who decide to “Go Green”.

Questions? Contact Robert D'Andrea, CPA, MST or any member of our Tax Services Group