The §179D Energy Efficient Commercial Building Deduction is a Federal tax incentive designed to promote taxpayers to construct energy efficient buildings as well as encourage building owners to make improvements to existing structures that reduce energy and power costs. As an added inducement, architects, engineers, contractors, environmental consultants or energy services providers may also be eligible for the incentive on public projects.
This incentive is often referred to as the EPAct Deduction after the Energy Policy Act of 2005, which created it, or as the §179D Deduction, which relates to the Internal Revenue Code section that codified it.
Commercial building owners can take a Federal tax deduction of up to $1.80 per square foot of the building’s floor area if they install property that reduces energy and power costs. These installations need to be a part of the building’s interior lighting systems, heating, cooling, ventilation, hot water systems or building envelope. The deduction is allowed for both new construction and remodeling and the building must be placed in service on or after January 1, 2006.
To achieve the maximum $1.80 deduction, energy and power costs must be reduced by at least 50 percent when compared to a reference building. If a building comes in under 50 percent, it may still qualify for a deduction of $.60 or $1.20 per square foot by looking at individual systems.
Examples of energy-efficient building materials and systems include:
A special rule allows a governmental entity to assign the deduction to the person primarily responsible for designing the building, such as architects or engineers. Similarly, the deduction may be assigned to contractors for designing and choosing efficiency upgrades, such as lighting and HVAC systems. Thus, if you are involved in the design of a community center, public educational facility, municipal parking garage, or other government building, you may qualify for the deduction.
A design/build company had numerous LEED certified projects and performed other energy efficiency retrofits for dozens of government-owned projects, including the construction of a classroom building for a public university and the installation of energy efficient lighting in city-owned parking garages. The deductions amounted to over $500,000 in immediate after-tax cash savings.