The Energy Policy Act of 2005 is one of the most comprehensive and sweeping energy legislation packages ever passed. Signed into law by President George W. Bush on Aug. 8, 2005, the bill authorized massive tax benefits, reductions and deductions, plus loan guarantees in an effort to spur action on a new energy policy.
Buried among these voluminous new initiatives — now part of the IRS Tax Code — was the new Deduction of Energy Efficient Buildings granted under Title 26, now known simply as Section 179D. Specifically, Section 179D offers substantial tax benefits to commercial property owners to upgrade their buildings and make them more energy efficient. The legislation was targeted to expire in 2008; however, the American Reinvestment and Recovery Act of 2009 extended the benefits of this bill through 2013. Perhaps due to the enormity of the legislative package or a lack of understanding, the IRS reports that less than 2 percent of all commercial property owners have taken advantage of this tax-saving opportunity.
There are special rules for government-owned buildings, wherein the tax benefits may be transferred to a project manager or architect. For purposes of this article, though, we will focus on how banks, as building owners and leaseholders, can leverage these benefits.
About the Actual Deduction
Under Section 179D, deductions are based on areas of energy savings and total square footage of a building. The regulation provides commercial building owners and leaseholders with a deduction for implementing energy-efficient commercial building materials in their buildings between Dec. 31, 2005, and Jan. 1, 2013. The deduction is available whether the respective space is new construction or already existing and applies to the year in which the energy-saving property was made ready for its intended use. It is divided into three categories: lighting; HVAC and hot water; and building envelope.
The maximum deduction of $1.80 per square foot requires a 50 percent reduction in total annual energy and power costs (compared to a reference building that meets the minimum requirements of American Standard of Heating, Refrigeration and Air Conditioning Engineers 90.1-2001), not to exceed the amount equal to the cost of energy-efficient commercial property placed in service during the taxable year. A partial deduction of 60 cents per square foot requires a 16-2/3 percent reduction in energy consumption, and can be achieved through improvements in one of the previous three categories (lighting, HVAC, building envelope).
With recent technological advances in lighting, as well as the generally lower costs compared to the other categories, this deduction is considered the “lowest hanging fruit.” A partial deduction for interim lighting affords the bank a deduction between 30 cents–60 cents per square foot and requires a 25–40 percent reduction in lighting power density (50 percent in the case of warehouses). As many banks have multiple branches, and this is a per-building incentive, the deductions can be quite substantial.
What about banks that may have already made significant investments in energy upgrades? Fortunately, the IRS rules allow banks to take deductions on qualified upgrades completed during the three prior tax years. For qualifying institutions, this is simply found money.
Certification of Qualified Property
To ensure receipt of expected credits, the taxpaying entity must certify the property meets all energy-conservation claims and establish the total annual energy savings required for obtaining a partial deduction. The guidelines provide information about the software programs that must be used in calculating these power and energy expenditures.
Additionally, the property must be certified as an energy-efficient commercial building property by a qualified individual. These individuals may not be related to the taxpayer and must be an engineer or contractor properly licensed in the jurisdiction where the building(s) is/are located. The certification need not be attached to the tax return, but Section 1.6001-1(a) of the IRS regulations state that taxpayers are required to maintain books and records that would satisfy investigation into the applicability of the deduction.
Joseph Winn is the president of GreenProfit Solutions Inc., a sustainability consulting, certifying and contracting firm. Contact Winn at 800-358-2901 or jwinn(at)greenprofitsolutions.com.
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