Energy Tax Deductions
The Energy Policy Act of 2005 added section 179D to the Internal Revenue Code. Section 179D permits an immediate deduction for the costs of installing certain energy efficient building systems in commercial buildings. Qualifying energy efficient systems include lighting systems, HVAC, hot water systems and portions of the building envelope.
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the property is depreciable;
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the property is placed in service after December 31, 2005 and before January 1, 2008;
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the property is installed in or on a building located in the United States;
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the building is within the scope of Standard 90.1-2001, which deals with energy efficient guidelines;
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the property is installed as part of the interior lighting systems, the HVAC and hot water systems, or the building envelope (see below examples); and
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an unrelated and qualified party certifies that the property will reduce the total annual energy and power costs by 50% compared to a reference building.
Examples of Energy Efficient Design Components
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Lighting
- Energy efficient lighting system
- Lighting control system (occupancy sensors/dimmable lighting)
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Envelope
- Energy effiency windows - Low "E"
- High reflective roofing
- Enhanced roof/wall insulation
- Day lighting with dimmable lighting system
- light shelves
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HVAC System
- High efficiency heating systems (condensing boilers)
- High efficiency cooling systems
- Direct and/or indirect evaporative cooling systems
- Energy recovery units
- Geothermal heat pumps
- Premium efficient motors
- Variable speed fan and pumps
- Building management systems
- Solar systems (PV and water)
The deduction is for the cost of the qualifying energy efficient
property, but it is capped at $1.80 times the square footage of
the building, including mezzanines and other intermediate floors. (There
are also reduced deductions available for partially qualifying property).
To claim the deduction:
- a taxpayer must have a qualified individual (either an engineer or a contractor licensed in the same jurisdiction as the building) perform a field inspection of the building
- a taxpayer must use qualified software from the Treasury Department’s list of certified software to calculate the energy savings
- a qualified individual must certify the results
Centerprise Group works in conjunction with engineers licensed
in the state where the project is located in order to maximize the deduction
available under Code section 179D.
The certification process for Code section 179D only determines whether the
deduction is available. The certification process does not involve determining
the cost of the qualifying energy efficient property. This creates a concurrent
need for cost segregation services for three reasons:
- engineers and contractors do not know how the indirect allocation rules work under the tax code;
- if the deduction applies to real property, that real property becomes section 1245 property eligible for a shorter depreciation recovery period; and
- the deduction appears to apply to both section 1250 real property and section 1245 tangible personal property.