179d Green Building Tax Deduction

Section 179D of the Federal Tax Code provides a federal tax deduction to encourage energy efficiency measures for qualifying properties of up to $1.80 per square foot for new construction and major renovations in commercial buildings.

The Energy Policy Act of 2005 (EPAct) of the United States Code Title 26, Internal Revenue Code. Sec. 179D, the “Commercial Building Tax Deduction” provides an immediate tax deduction for the cost of energy-efficient improvements to commercial property designed to save energy through envelope, HVAC and lighting system improvements. The Emergency Economic Stabilization Act of 2008 (HR-1424), approved and signed on October 3, 2008, extends the benefits of the Energy Policy Act of 2005 through December 31, 2013. These tax deductions are available for systems “placed in service” from January 1, 2006 through December 31, 2013.

The maximum deduction allowed is $1.80 per square foot of the building, less the aggregate of all prior-year deductions taken for the building under this provision. The property basis is then reduced by the deduction taken. Although this new deduction will primarily benefit real estate businesses, it will have some benefit to owners of commercial lease property.

There are specific requirements that must be satisfied to enable taxpayers to claim the new deduction.

1. The building must be located in the US and fall within the scope of ASHRAE Standard 90.1-2001 (Energy Standard for Buildings Except Low-Rise Residential Buildings).

2. The building must include improvement over baseline for interior lighting systems, the HVAC or hot water system, or the building envelope. And while “building envelope” isn’t defined by Sec. 179D, in Sec. 25C(c)(2) the term is defined as including the wall and roof assemblies, insulation, air/vapor barriers, windows and weather-stripping and caulking.

3. The property must be certified as being installed as part of a plan designed to reduce the total annual energy and power costs with respect to the buildings interior lighting systems and heating, cooling, ventilation and hot water systems by 50% or more in comparison to a reference building that meets the minimum requirements of Standard 90.1-2001. Note: to qualify for the full deduction, the cost reduction plan must target all the systems specifically identified in Sec. 179D(c) (1)(D). The reduction applies to overall energy savings and not the savings of any particular system.

Sec. 179D(d)(1) provides a partial allowance if a taxpayer replaces one of the systems allowed under Sec. 179D(c) (1)(C), and the replacement meets the target for that system. The partial deduction available for the cost of the systems installed is up to $0.60 per square foot of the building for each of the above referenced systems: lighting, mechanical or envelope, to total the maximum allowable deduction of $1.80 per square foot.

Qualified Individuals:

Notice 2006-52 under Section 179D states that a "Qualified Individual" is: An individual that (1) Is not related (within the meaning of §45(e)(4)) to the taxpayer claiming the deduction under § 179D; (2) Is an engineer or contractor that is properly licensed as a professional engineer or contractor in the jurisdiction in which the building is located; and 19 (3) Has represented in writing to the taxpayer that he or she has the requisite qualifications to provide the certification required under section 4 of this notice (in the case of an individual providing the certification) or to perform the inspection and testing described in section 4.05 of this notice (in the case of an individual performing the inspection).

The tax deduction that is available through IRS Section 179D does not list being a LEED AP among the qualifications necessary to be a "qualified individual" who is able to perform the necessary certification of any energy efficient investments that would comply with the section. Being a LEED AP is probably too recent a designation for the IRS to consider it. Being a Professional Engineer does seem to be one way to comply under the section.

The licensing for individuals providing certification for work that qualifies for section 179d is at the state level as either a contractor (which not all states require licensing for contractors) or as a professional engineer (PE). Being a LEED AP does not automatically qualify you to do this work.

Once qualified, you must also use software that is approved for this energy modeling. However, the nature of the work being evaluated for 179d is also a factor. In other words, if the project is for lighting only you could do under what is called the interim rules where you prove out efficiency via a lighting power density calculation in which modeling is not required.

To learn more about section 179d, visit IRS.gov.

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