Green Tax Incentives for Commercial Buildings

The Energy Efficient Commercial Building Deduction is allowed under IRC Sec. 179D. This code section was originally added by the Energy Policy Act of 2005 and was extended through 2008 legislation. Section 179D now applies to properties placed in service after December 31, 2008 and before January 1, 2014. Unlike most of the incentives I've covered in earlier blog posts, this incentive is based on a deduction and not a credit.

Section 179D allows an immediate deduction for the cost of energy efficient building property placed in service during the year. The maximum amount of the deduction is $1.80 per square foot on a lifetime basis and is available for energy efficient building property place in service after 2005 and before 2014. The maximum deduction in any taxable year would be equal to $1.80 x square footage of the building less the aggregate amount of Sec. 179D deductions for all prior tax years.

Note that this section applies to both new construction and renovations.

The maximum 179D deduction of $1.80 per square foot is actually comprised of three separate components:

1. Building envelope
2. Lighting
3. HVAC

Each component is worth a maximum $0.60 per square foot deduction.

To qualify for these deductions, commercial building performance must exceed baseline standards. Any deduction allowed under 179D reduces the depreciable basis of the property.

The standards for each of these three building components is far too detailed and specific to delve into here but let me point out a couple things to be aware of.

First, because Sec. 179D deductions are based on square footage - the bigger the building, the larger the deduction. These deductions can be huge for distribution centers, parking garages and other facilities with large footprints. As a rule of thumb, I've heard a building needs to be greater than 50,000 sf before these provisions are cost effective due to the documentation and increased costs necessary to qualify for the deduction.

I've also heard that the construction cost needs to be north of $1 million before deciding whether to pursue these deductions because the cost of proving performance will exceed the deduction on smaller projects.

This deduction is available to either the building owner or the tenant, depending on who incurred the costs.

In the case of a government-owned building, the Sec. 179D deduction is awarded to the primary designer should the building qualify based on performance. An architect, engineer, contractor or energy consultant who creates the technical specifications for a new building or an addition to an existing building which incorporates the necessary performance standards may qualify for this deduction.

A government-owned building is any publicly owned building such as a prison, school, water treatment facility, court house, military facility, etc., etc. Designers working on such projects can qualify for some huge deductions under this code section.