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Energy Tax Deductions - Build Green, Save Green

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High energy costs have always been an incentive for improving the energy efficiency of commercial buildings. Now that the threat of global climate change and record-high costs have ratcheted up the urgency, federal tax deductions originally passed in 2005 give commercial property owners, and in some cases, architects, engineers and contractors, generous allowances for the construction or renovation of energy-efficient buildings.

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These tax deductions are available for systems “placed in service” in U.S.-located commercial buildings from January 1, 2006 through December 31, 2013, even if the deductions were not originally taken in 2006 or 2007, they can generally be claimed now by amending previously filed returns. The Emergency Economic Stabilization Act of 2008 recently extended the previous deadline of December 31, 2008 through 2013.

Varying deductions

Projects may be won or lost based in part on the degree to which energy-saving materials and systems are incorporated into the design. Professionals involved in the construction process can play a critical role in promoting and designing buildings that maximize energy efficiency and tax savings. The ability to provide this expertise adds substantial value to their services. And if the construction is related to a government-owned building, the energy deductions may be transferred to the architect, engineer or contractor. Building owners can qualify for deductions ranging from 60 cents to $1.80 per square foot for buildings that are constructed or renovated to save from 10% to 50% on total annual energy costs compared to Standard 90.1-2001 of the American Society of Heating, Refrigeration and Air Conditioning Engineers (ASHRAE). A building tenant may also qualify if the tenant installs and pays for the energy-saving upgrades.


JOHNSON

The energy savings must be achieved by constructing or renovating any one of three building systems: the envelope (exterior walls, floor, roof, doors, windows, etc.), interior lighting or heating, cooling and hot water systems. 

If the building does not meet the 50% energy savings requirement, it may still qualify for a partial deduction of 60 cents per square foot if energy costs related to the envelope, interior lighting, or heating, cooling and hot water systems are reduced by 16.7%. A special election for the building envelope is available if overall energy costs are reduced by 10% and interior lighting and heating, cooling and hot water systems are reduced by 20%. 

Special interim rules, in effect prior to publication of final Section 179D regulations, allow up to 60 cents per square foot deduction for a 40% reduction in “lighting power density.” Various other requirements must be met, but the calculation of this deduction is significantly easier and requires no other energy cost reductions within the building.

Government buildings

Government buildings are an exception to the general rule that only building owners can take the deduction for energy-efficient property. These exceptions represent the biggest opportunity for architects, engineers or contractors. Since government entities do not pay taxes and cannot benefit from the incentive, any of these professionals may qualify for the deduction if they are responsible for the design of the energy-saving system(s). The designer is defined as the creator of the technical specifications for installation of energy-efficient property.  

The law applies to local, state and federal buildings owned by government entities and is most commonly seen in the construction or renovation of public schools, colleges and universities.

Before deductions can be claimed for either government or privately owned buildings, the taxpayer must obtain certification of energy savings from a qualified licensed professional engineer or third party contractor using Department of Energy-approved software.

Don’t forget to also explore state and local incentives. In addition to federal incentives, many state and local governments and public utilities offer rebates, loans, tax credits and other incentives for energy-saving upgrades. An up-to-date listing can be found at the Database of State Incentives for Renewables and Efficiency (www.dsireusa.org).

This benefit is enduring

There is little doubt that green building is here to stay. The value of green building construction is projected to increase to $60 billion by 2010. Whether or not current energy tax deductions are available to qualified building owners, engineers, architects and contractors becomes less of a consideration in light of the long-term benefit of energy efficiency – reduced energy consumption and lower costs. Engineers, architects and contractors that educate themselves and their customers about green technologies and building methods will be better positioned to be a part of the green market of the future.

Lee H. Johnson is a partner in Clifton Gundersonís Denver office.
He can be reached at Lee.Johnson@cliftoncpa.com or (303) 779-5710.

 

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