Frequently Asked Questions
What is Section 179D?
The Energy Efficient Commercial Building Tax Deduction is a federal tax incentive that allows owners of commercial property to deduct, from their federal taxes, up to $1.80 per square foot for qualifying energy-efficient property. It also contains a provision that allows public entities to allocate this tax incentive to the designer of the energy-efficient property, since public entities do not pay taxes.
Why was it created?
The Energy Policy Act of 2005, EPAct, created the Energy Efficient Commercial Building Tax Deduction, recognizing that commercial buildings are responsible for a substantial portion of U.S. energy consumption. It provides building owners with a tax incentive to help offset the costs associated with enhancing the energy-efficiency of commercial buildings. The provision, codified in 26 U.S.C §179D and therefore referred to as Section 179D, allows the owner of a commercial building to deduct the costs of energy efficiency enhancements, up to $1.80 per square foot. Section 179D is available for upgrades, retrofits or new construction of lighting, HVAC/hot water and the building envelope.
What is the amount for the tax deduction?
The maximum deduction is $1.80 per square foot for a 50% or greater reduction in total annual energy and power costs (compared to a reference building that meets the minimum requirements of ASHRAE Standard 90.1 – 2001), not to exceed the amount equal to the cost of energy-efficient commercial building property placed in service during the taxable year.
Partial deduction is $.60 per square foot for a 25–40% reduction in lighting power density (50% in the case of warehouses). The three compliance paths to receiving the tax deduction: 1) Whole building qualification with 50% energy and power cost savings (as shown through energy simulation); 2) Partial qualification for envelope, HVAC/hot water, and lighting (with energy and power cost savings shown for the various systems through energy simulation; 3) Partial qualification through the interim lighting rule (based on reductions in lighting power density).
What types of buildings will qualify? What types of expenditures will qualify?
Energy-efficient commercial building property is defined as property that is:
1. Installed on or in any building located in the United States that is within the scope of Standard 90.1-2001 (Energy Standard for Buildings Except Low-Rise Residential Buildings), of the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Societyof North America;
2. Installed as part of the interior lighting systems; the heating, ventilation, cooling, and hot water systems; and/or the building envelope; and
3. Certified as being installed as part of a plan designed to reduce the total annual energy and power costs of interior lighting systems, heating, cooling,ventilation and hot water systems of the building by 50% or more when compared to a reference building which meets the minimum requirements of Standard 90.1-2001 (which came into effect on April 2, 2003).
For public buildings, see below
Do public buildings qualify for this tax deduction?
For energy-efficient property expenditures made by a public entity that does not pay taxes, such as a public school, IRS guidelines issued in 2008 allow the deduction to be allocated to the person primarily responsible for designing the property.
Does the tax deduction apply to existing buildings as well as new construction?
Yes. The historical performance of existing buildings is not used in the energy savings calculations for the tax deduction. Like newly constructed buildings, retrofits and upgrades are measured against reference building models for determining the energy and power cost savings — models based, like those for new construction, on ASHRAE Standard 90.1-2001.
Are partial deductions allowed for building subsystems instead of a whole-building deduction?
In the case of a building that does not meet the whole-building requirement of a 50% energy savings, a partial deduction is allowed for each separate building system that comprises property and which is certified by a qualified professional as meeting or exceeding the applicable system savings targets.
The savings targets are those that would result in a total annual energy savings of 50% for the whole building, if each of the separate systems met the system target. Note that the maximum allowable deduction for each subsystem is $.60 per square foot.
The separate building systems are:
- Interior lighting system
- Heating, ventilation, cooling and hot water systems
- Building envelope
As of March 2012, the subsystem targets are 25% for interior lighting, 15% for HVAC and hot water, and 10% for the building envelope.
What is the interim lighting rule?
The interim lighting rule applies to properties where the installed lighting power density is reduced at least 25% below ASHRAE Standard 90.1-2001. The tax deduction varies linearly from $0.30/ft.2 at 25% savings to $.60/ft.2 at 40% savings. Warehouses are required to be 50% below Standard 90.1-2001. Lighting controls must comply with the mandatory and prescriptive requirements of Standard 90.1-2001, and include a provision for bi-level switching in all spaces except hotel and motel guest rooms, storerooms, restrooms, and public lobbies. Illuminance levels must meet the minimum requirements as set forth in the IESNA Lighting Handbook
Is bi-level switching required for the lighting subsystem deduction?
Bi-level switching is required when you use the interim rule, but not when lights are completed using energy modeling procedures.
Which buildings do not qualify for the Section 179D tax deduction?
Buildings that do not use electricity or fossil fuel; single-family homes; multi-family buildings with three or fewer stories above grade; manufactured houses. Buildings owned by religious organizations do not qualify because they are tax-exempt.
Which energy modeling programs are qualified for verifying the Section 179D commercial building tax deduction?
A list of all DOE-approved modeling programs can be found at http://energy.gov/eere/buildings/building-technologies-office
Can multiple taxpayers participating on a project in the same building claim the tax deduction?
Yes, if two or more taxpayers participate in tax-deductible activities on or in the same building and the property is subject to the permanent rule. However, the aggregate amount of the Section 179D deductions allowed cannot exceed the allowable amount for the specific tax deduction.
Can my tax preparer do this? If so, how come they haven’t brought it to my attention yet?
Not all tax professionals are aware of Section 179D benefits. Your tax preparer must follow all the guidelines as prescribed in the IRS Notices, and employ (or act as) an independent third-party certifier.
The Section 179D Process
How does Section 179D work?
1. The building must be located in the US and fall within the scope of ASHRAE Standard 90.1-2001 (Energy Standard for Buildings Except Low-Rise Residential Buildings).
2. The building must include significant improvements over baseline for interior lighting systems, the HVAC or hot water system, or the building envelope.
3. The property must be certified as having been installed as part of a plan designed to reduce total annual energy costs by 50% or more (compared to a reference building that meets the minimum requirements of Standard 90.1-2001).
4. Section 179D provides a partial allowance if a taxpayer replaces one of the systems allowed under Sec. 179D(c) (1)(C), and the replacement meets the target for that system. The partial deduction available for the cost of the systems installed is up to $.60 per square foot of the building for each of the above referenced systems—lighting, mechanical or envelope—to total the maximum allowable deduction of $1.80 per square foot.
What is the feasibility review?
Our professional engineering team will conduct a feasibility study/consultation for your project(s). This study is free and requires no obligation from you. The feasibility study allows us to prequalify your project for consideration of the Section 179D Tax Deduction.
Are there certification requirements? If so, what are they?
Before a taxpayer may claim the §179D deduction, the taxpayer must obtain a certification with respect to the property. The certification must be provided by a qualified individual and satisfy the requirements of §179D(c)(1). A taxpayer is not required to attach the certification to the return on which the deduction is taken. However, §1.6001-1(a) of the Income Tax Regulations requires that taxpayers maintain such books and records as are sufficient to establish the entitlement to, and amount of, any deduction claimed by the taxpayer. Accordingly, a taxpayer claiming a deduction under §179D should retain the certification as part of the taxpayer’s records for purposes of §1.6001-1(a) of the Income Tax Regulations. (See http://www.irs.gov/irb/2006-26_IRB/ar11.html)
Will there be inspections of buildings to determine compliance? Who will make them?
IRS regulations require an inspection to quality for the Section 179D deduction. A qualified Concord representative will complete the site inspection.
Who benefits from Section 179D?
Everyone. The Section 179D tax deduction can provide substantial cost savings in two ways: (1) overall tax savings; and (2) cost savings due to energy efficiency improvements (lower energy bills). Section 179D promotes leading edge design and construction which enhances long term market value of building projects while contributing to a cleaner environment.
Architectural and engineering firms that design government buildings can reap significant tax savings benefits from the Section 179D deduction.
Commercial building owners can take an immediate deduction for the installation of energy-efficient lighting, HVAC (heating, ventilation and air conditioning), hot water systems and building envelopes (walls, windows,etc.) that exceed the specified energy-efficiency standard.
If a tenant in a commercial building makes improvements that would meet the energy savings standard, could they get a deduction?
If a leaseholder in a commercial building makes improvements in the space that they lease, and these improvements are technically owned by them (and therefore are being depreciated on their books), then they can claim the deduction because they own the improvements — even though they don’t own the building, and even though, in most instances, a tenant improvement will revert to the landlord at the end of a lease.
Are there special rules for Designers?
For publicly owned buildings, who is eligible to receive the Section 179D tax deduction?
The designer, who is a person who creates the technical specifications for installation of energy efficient commercial building property. A designer may be an architect, an engineer, a contractor, an environmental consultant or energy services provider. A person that merely installs, repairs, or maintains the property, however, is not a designer. (For the full definition, see http://www.irs.gov/irb/2008-14_IRB/ar12.html)
Are there requirements for a designer to qualify for the Section 179D deduction?
A designer must obtain a signed allocation letter from the building owner.
What is an allocation letter?
A written declaration from the owner of the government-owned building allocating all or part of the Section 179D deduction to a designer. It must be signed by an authorized representative of the owner of the government-owned building and an authorized representative of the designer. (The format is described at http://www.irs.gov/irb/2008-14_IRB/ar12.html)
What do you do with the signed allocation letter?
The taxpayer is not required to attach the signed allocation letter to any tax return, but income tax regulations require taxpayers to maintain books and records to establish their entitlement to the deduction, and amount of, any deduction claimed by the taxpayer. The allocation letter should be kept with this documentation.
Can Concord help me obtain an allocation letter?
Yes. Contact Concord — a qualified third party very familiar with this specific issue — to secure the allocation letter before taking any other steps.
How do I apply for Section 179D benefits?
What documentation is required and what must the taxpayer do with it?
Before a taxpayer may claim the Section 179D deduction with respect to property installed on or in a commercial building, the taxpayer must obtain and retain an independent third-party energy analysis and certification completed in accordance with IRS regulations.
What qualifies an individual to certify the documents?
There are two chief requirements: 1) that the individual is a third party not related to the taxpayer claiming the deduction under Section 179D; and (2) is an engineer or contractor who is properly licensed as a professional engineer or contractor in the jurisdiction where the building is located.
Who do I call?
Concord Energy Strategies – 502-384-9078 (or toll-free at 888-897-5445)
What about… ?
Can portions of buildings be retrofitted and still qualify for a deduction—for example, a common area, or a portion of one?
Portions can be retrofitted and the associated square footage areas considered.
Are parking garages eligible for the deduction?
Does outdoor lighting qualify?
Have a Question Not Covered Here? Contact Concord today.
Dennis J. Stilger, Jr
Toll-Free: (888) 897-5445
Local: (502) 384-9078
Fax: (502) 384-9079