Tax Incentives

A little-known provision of the tax code allows those who make buildings more energy-efficient to increase their profits dramatically – if they obtain the proper certification.

Section 179D (also known as EPAct) allows owners or designers of an energy-efficient building to take a deduction of as much as $1.80 per square foot in the year the project goes into service.

The deduction is available for reductions in the energy usage of these systems:

• Building envelope
• HVAC/hot water systems
• Interior lighting systems

The maximum deduction is given to projects that reduce their total energy costs by 50 percent or more. Failing that, there are subsystem deductions for significant energy savings: $.60 per square foot for the building envelope or the HVAC/hot water systems, and from $.30-.60 per square foot for lighting, depending upon the method used for qualifying the lighting system deduction. For more info on Section 179D tax deduction, follow this link.

To claim the deduction, a building’s owner or designer must have the energy savings certified by a third-party, independent firm such as Concord.

The deduction is available for both new buildings and retrofits. It’s technology-neutral — not favoring any particular means of reducing energy use in a building system.

If the building is a government-owned property, such as a school or library, the government entity can allocate the deduction to one or more designers of the project. “Designer” is defined as anyone who creates the technical specifications for installing the qualifying property and its subsystems; it can include architects, engineers, contractors, environmental consultants, energy services companies (ESCOs) or others. The designer receives the deduction’s benefit — and the government entity receives the continuing benefit of lower energy costs.

Congress enacted Section 179D as part of the Energy Policy Act of 2005. It was intended to incentivize the building of energy-efficient properties and make a major impact on the goal of energy independence. Commercial buildings constitute a substantial portion of energy consumption in the U.S.; the lower energy bills caused by efficient design create real cost savings in both the private and public sectors. And Section 179D encourages innovations in design and construction methods.

With the passage of the Energy Policy Act of 2005, tax planning became an important consideration for a broad range of upgrades designed to improve energy efficiency. EPAct created Section 179D of the Internal Revenue Code, which provides federal tax deductions as incentives to make buildings more energy efficient. In 2013, energy efficiency tax planning has a special urgency. That’s because the current Section 179D tax provisions are scheduled to expire on Dec. 31, 2013. A proposal to extend EPAct for three years, through Dec. 31, 2016, and to expand the beneficiary categories, has been introduced in the Senate. That proposal includes a new Section 179F, with a provision for a $4 per square foot tax deduction for so-called “deep retrofits.”