Guest Column
July 1, 2008
By: Mario DeLuca, tax partner in Cherry, Bekaert and Holland L.L.P.
Many commercial property owners have considered taking a more proactive approach toward managing their buildings' energy costs. Energy-efficient upgrades will no doubt reduce operating expenses over the long term, but the interim costs associated with such improvements may often seem prohibitive. However, a recently extended federal tax deduction offers property owners an additional incentive: the opportunity to increase profits and realize a more immediate return on their investments.
Originally set to expire last year, the commercial-building tax deduction, enacted as part of the Energy Policy Act of 2005, has been extended through Dec. 31, 2008, allowing property owners more time to take advantage of the savings. Section 1331 of the act, amended to the Internal Revenue Code as Section 179D, gives commercial property owners and lessees the opportunity to claim tax deductions for energy-efficient improvements made to a building's interior lighting, HVAC, hot-water and building-envelope systems.
Through this deduction, property owners can recognize significant tax savings against the cost of installing energy-efficient options this year rather than waiting to recover the costs through depreciation deductions over the next 39 years.
To be eligible for the deduction, improvements must fall within the scope of the American Society of Heating, Refrigerating and Air-Conditioning Engineers' Standard 90.1-2001, or "Energy Standard for Buildings Except Low-Rise Residential Buildings." A property qualifies as energy-efficient under the tax code if its energy costs are 50 percent lower than this standard's model for the building type.
Should the energy costs for the entire building meet that requirement, the Section 179D deduction is equal to the total cost of installation up to $1.80 per square foot. If the entire building does not meet the 50 percent requirement, partial deductions are available for improvements made to the interior lighting, HVAC, hot-water and building-envelope systems. To qualify for the partial deduction, capped at 60 cents per square foot for each system, improvements must reduce energy costs at least 16.66 percent. In Notice 2006-52, the IRS expanded the deduction for lighting improvements to include a 25 to 40 percent reduction in lighting-power density.
The basis of the energy-efficient improvements is reduced by the full or partial deduction amount, and any amount not available for immediate deduction is capitalized and depreciated over the life of the upgrade.
Though these tax deductions benefit owners, certain tenant improvements, such as installation of energy-efficient windows, may also qualify. In addition, designers of energy-efficiency-improvement plans for government-owned buildings can qualify.
Property owners must meet a few other restrictions to gain the deduction, as well. The building must be located in the United States, and the improvement must be depreciable property installations completed between Dec. 31, 2005, and Jan. 1, 2009. In addition, a qualified engineer or contractor also must certify that the improvement complies with the energy-cost-savings requirements outlined above. This inspector must calculate the savings using one of the IRS-approved software programs detailed in Notice 2006-52.
The Section 179D deduction is a valuable incentive, but unfortunately, time is limited. I urge commercial property owners to take advantage of it while they can.
By: Mario DeLuca, tax partner in Cherry, Bekaert and Holland L.L.P.
Many commercial property owners have considered taking a more proactive approach toward managing their buildings' energy costs. Energy-efficient upgrades will no doubt reduce operating expenses over the long term, but the interim costs associated with such improvements may often seem prohibitive. However, a recently extended federal tax deduction offers property owners an additional incentive: the opportunity to increase profits and realize a more immediate return on their investments.
Originally set to expire last year, the commercial-building tax deduction, enacted as part of the Energy Policy Act of 2005, has been extended through Dec. 31, 2008, allowing property owners more time to take advantage of the savings. Section 1331 of the act, amended to the Internal Revenue Code as Section 179D, gives commercial property owners and lessees the opportunity to claim tax deductions for energy-efficient improvements made to a building's interior lighting, HVAC, hot-water and building-envelope systems.
Through this deduction, property owners can recognize significant tax savings against the cost of installing energy-efficient options this year rather than waiting to recover the costs through depreciation deductions over the next 39 years.
To be eligible for the deduction, improvements must fall within the scope of the American Society of Heating, Refrigerating and Air-Conditioning Engineers' Standard 90.1-2001, or "Energy Standard for Buildings Except Low-Rise Residential Buildings." A property qualifies as energy-efficient under the tax code if its energy costs are 50 percent lower than this standard's model for the building type.
Should the energy costs for the entire building meet that requirement, the Section 179D deduction is equal to the total cost of installation up to $1.80 per square foot. If the entire building does not meet the 50 percent requirement, partial deductions are available for improvements made to the interior lighting, HVAC, hot-water and building-envelope systems. To qualify for the partial deduction, capped at 60 cents per square foot for each system, improvements must reduce energy costs at least 16.66 percent. In Notice 2006-52, the IRS expanded the deduction for lighting improvements to include a 25 to 40 percent reduction in lighting-power density.
The basis of the energy-efficient improvements is reduced by the full or partial deduction amount, and any amount not available for immediate deduction is capitalized and depreciated over the life of the upgrade.
Though these tax deductions benefit owners, certain tenant improvements, such as installation of energy-efficient windows, may also qualify. In addition, designers of energy-efficiency-improvement plans for government-owned buildings can qualify.
Property owners must meet a few other restrictions to gain the deduction, as well. The building must be located in the United States, and the improvement must be depreciable property installations completed between Dec. 31, 2005, and Jan. 1, 2009. In addition, a qualified engineer or contractor also must certify that the improvement complies with the energy-cost-savings requirements outlined above. This inspector must calculate the savings using one of the IRS-approved software programs detailed in Notice 2006-52.
The Section 179D deduction is a valuable incentive, but unfortunately, time is limited. I urge commercial property owners to take advantage of it while they can.
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