Business Tax Incentives
What is the tax incentive for commercial buildings?
A tax deduction of up to $1.80 per square foot is available to owners or tenants (or designers, in the case of government-owned buildings) of new or existing commercial buildings that are constructed or reconstructed to save at least 50% of the heating, cooling, ventilation, water heating, and interior lighting energy cost of a building that meets ASHRAE Standard 90.1-2001. Only buildings covered by the scope of ASHRAE Standard 90.1-2001 are eligible. Partial deductions of $.60 per square foot can be taken for improvements to one of three building systems that reduce total heating, cooling, ventilation, water heating and interior lighting energy use by a certain percentage—the building envelope (10%), lighting (20%), or heating and cooling system (20%). An interim system-specific goal for lighting is provided directly in the legislation and is valid until the IRS issues a final regulation. The interim lighting provision allows prororated deductions from 30 cents to 60 cents per square foot for lighting systems as described below.
These deductions are available for buildings or systems placed in service from January 1, 2006, through December 31, 2013.
Who is eligible for the incentives?
The person or organization that makes the expenditures for construction is generally the recipient of the allowed tax deductions. This is usually the building owner, but for some HVAC or lighting efficiency projects, it could be the tenant. For government-owned buildings, the deduction may be taken by the building or system designer. Click here for the complete IRS rules.
What are the incentives and how do they work?
The builder (or designer in the case of publicly-owned buildings) can take the deduction in the year the property was placed in service. The building or system must be certified, with inspection and testing, as meeting the energy cost savings goal according to guidance issued by the IRS in consultation with the Department of Energy (a link to this guidance is provided below).
Key provisions in the guidance include the following:
- Certifications must be done by "qualified individuals". Qualified individuals must be licensed engineers or contractors, not be "related" to the taxpayer taking the deduction (as defined by the IRS), and self-certify to the taxpayer that he or she has qualifications to provide the certification.
- Certifications for energy savings shall be in accordance with the procedures in Appendix G of ASHRAE Standard 90.1-2004, supplemented with several provisions in the 2005 California Title 24 Nonresidential Alternative Calculation (ACM) Approval Manual. Generally calculations will be done by computer software. Software must be on a list of products approved by the U.S. Department of Energy.
- The certification must include a field inspection of the building after the building is placed in service to confirm that the building has met the savings goals. Specific inspection and testing procedures have been developed by the National Renewable Energy Laboratory and can be downloaded by clicking here.
- Certifiers must also provide the building owner with an explanation and list of the energy efficiency features of the building and the projected annual energy costs.
For lighting systems, until the IRS issues a final rule, the law specifies that a deduction of $0.30 per square foot can be taken if the lighting system employs dual switching (ability to switch roughly half the lights off and still have fairly uniform light distribution) and reduces installed lighting power by at least 25% from values specified in specific cited tables in ASHRAE Standard 90.1-2001. As lighting power reductions climb from 25% to 40%, the deduction is increased proportionally, up to $0.60 for a 40% power reduction (plus the dual switching). This prorated credit does not apply to warehouse lighting.
What do I have to do to qualify for the incentives?
Follow the guidance issued by IRS – a link is provided below. For a taxpayer, they will need to know the square footage of the building (the IRS guidance explains how to calculate this), when the building was placed in service, and have a certification from a qualified individual stating which targets have been met (50% savings for three systems or 16 2/3% savings for one system). There are no special forms to apply for this deduction, click here for details.
Where can I learn more about qualifying technologies and designs?
- U.S. Department of Energy:
- National Electrical Manufacturers Association Guidance on Certification Letters
- For design advice concerning how to meet the whole building savings goals:
- For information on qualifying lighting systems:
- For additional information on the commercial building tax deductions: