If you own, lease, design, or build energy efficient commercial buildings, you may be entitled to a federal income tax deduction for the cost of energy efficient building property. Internal Revenue Code Section 179D caps this deduction at $1.80 per square foot. Thus, for a building that is 250,000 square feet, the potential deduction is $450,000. To qualify for the deduction, several criteria must be satisfied.
First, the building must be located in the United States and must be within the scope of the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) Standard 90.1-2001, which generally includes all covered structures other than single family houses and multi-family structures that have less than four stories above ground.
Second, the deduction is allowed for the cost of energy efficient building property, which is defined as property that is (1) depreciable, (2) installed as part of the interior lighting, HVAC and hot water, or building envelope systems, and (3) certified as contributing to the interior lighting, HVAC, and hot water systems using at least 50% less energy and power than a reference building under ASHRAE Standard 90.1-2001. If you do not satisfy the 50% threshold, Internal Revenue Code Section 179D provides a formula for calculating partial deductions.
Third, the energy efficient building property must be placed in service before January 1, 2014. This deadline had been January 1, 2009 until it was recently extended. Further, you must take the deduction in the tax year in which the energy efficient building property was placed in service.
For privately owned buildings, the deduction may be taken by the building owner unless the energy efficient building property is installed by a lessee, in which case the deduction is available to the lessee. For buildings owned by public entities, such as a federal agency, or a state, county, city, or town, the owner may assign the deduction to the principal designer. This will often times be the design-build entity if the building was built under the design-build delivery system. Thus, a design-builder may be entitled to a lucrative tax deduction by virtue of working on a public project that satisfies the criteria discussed above.
Numerous federal agencies, as well as states, counties, cities, and towns across the country now require that their public buildings satisfy energy efficiency standards. As a result, there may be a substantial number of buildings for which designers and design-builders qualify for this deduction.