PROBLEM

Commercial buildings use too much energy, primarily due to under-insulated walls and roofs, inefficient heating and cooling systems, and the use of obsolete lighting systems.

According to the US Department of Energy, buildings use nearly 40% of the total energy consumed in the US and nearly 3/4 of all electricity generated. Effective management of commercial building energy use is a key element of our overall national energy policy.

Solution

Encourage owners to install energy efficient systems in buildings providing incentives through tax deductions. Provide a flexible system that provides benefits to owners of existing buildings and to owners planning for new construction. Develop strategies that address a wide range of reasonably priced energy related products that can be used on small and large building types.

APPROACH

Provide tax deductions of up to $1.80 per square foot for owners of energy efficient commercial buildings that were placed in service in 2006-2013.

LEGAL BASIS

The Energy Policy Act of 2005 (EPAct 2005) is a comprehensive bill that addresses energy policy. Section 1331 was originally set to expire at the end of 2008 but was extended to 5 years to 2013 under the Emergency Economic Stabilization act of 2008.

Click here for links to the full text of both legislative documents.

POTENTIAL DEDUCTION

Properties that show a 50% improvement over a baseline case are eligible for a $1.80 per square foot deduction. This typically requires an improved thermal envelope, HVAC, and lighting systems.

Deductions start at $0.60 per square foot for lighting replacements or upgrades. Deductions between $0.60 and $1.80 per square foot are available for properties that achieve energy savings between 17% and 50% over the baseline case.

ELIGIBLE PROPERTY CHARACTERISTICS

The property has to be placed in service no earlier than 2006. This means the energy efficient systems have been installed and are being used by the owner no earlier than 2006.

The deduction must be taken in the year the property was placed in service. Old returns can be re-filed to use the tax deduction. Once claimed, deductions can be carried forward and used in future tax years.

DESIGNER PROVIDES COMPLETE DRAWINGS AND SPECS TO AN INDEPENDENT ENERGY CONSULTANT (EC)

• The EC must not be related to taxpayer.
• The EC must not have been involved in the design of subject property.
• The EC must be a licensed engineer in the same state as the subject property.
• The EC provides a written statement that they are qualified to prepare IRS Energy Analysis.

OWNER EVALUATES TAX STRATEGY

• The tax deduction must be claimed in the year the property was placed in service, but it is possible to amend tax filings up to three years after they were filed. In other words, a building placed in service in 2006 can be claimed if the amendments are implemented with the 2009 return.
• The tax deduction can be carried forward.
• Taking the tax deduction has similar tax consequences as depreciation, therefore a project-specific analysis of short- and long-term impacts is recommended.

OWNER MAY "ALLOCATE" THE TAX DEDUCTION TO THE "DESIGNER"

• The project owner may allocate the dedution to one "designer" or "multiple designers".
• The "designer" is the person that creates the technical specifications for the inspection of energy effecient commercial building property.

DESIGNER PROVIDES COMPLETE DRAWINGS AND SPECS TO AN INDEPENDENT ENERGY CONSULTANT (EC)

• The EC must not be related to taxpayer.
• The EC must not have been involved in the design of subject property.
• The EC must be a licensed engineer in the same state as the subject property.
• The EC provides a written statement that they are qualified to prepare IRS Energy Analysis.

OWNER'S ALLOCATION OF THE TAX DEDUCTION MUST BE IN WRITING

The owner must sign a standard allocation form that includes the following information:

• Property characteristics including address, cost, and date placed in service
• The amount of the allocated tax deduction
• The designer's signature
• An owner declaration and signature

DESIGNER EVALUATES TAX STRATEGY

• The tax deduction must be claimed in the year the property was placed in service, but it is possible to amend tax filings up to three years after they were filed. In other words, a building placed in service in 2006 can be claimed if the amendments are implemented with the 2009 return.
• The tax deduction can be carried forward.
• Taking the tax deduction has similar tax consequences as depreciation, therefore a project-specific analysis of short- and long-term impacts is recommended.

ENERGY CONSULTANT TASKS: STEP 1

The EC runs the building information through IRS-approved energy modeling software:

• The energy model compares the design of the actual building to a baseline 'reference building' that is based on minimum requirements of an energy standard developed by the American Society of Heating, Refrigerating and Air-Conditioning Engineers called ASHRAE Standard 90.1-2001.
• The deduction that can be claimed under the 179D program is determined by the reduction in energy use that the actual building's model has over the reference building's modeled energy use.
• This process is very similar to the way the Leadership in Energy and Environmental Design (LEED) rating systems determine points for energy efficiency, though LEED compares the actual building performance to more stringent baseline requirements based on updated ASHRAE standards.
• A property does not need to be LEED certified to qualify.

ENERGY CONSULTANT TASKS: STEP 2

The EC must inspect the subject property to verify materials, products, and systems that were used in software analysis are actually included in the building.

ENERGY CONSULTANT TASKS: STEP 3

After the model is complete and the inspection has taken place, the EC certifies the energy model and energy cost savings.

• A 16 2/3% savings over the reference building results in $0.60 per square foot deduction.
• A 50% savings over the reference building results in $1.80 per square foot deduction.

OTHER RELATED INCENTIVES AND REBATES MAY BE AVAILABLE TO OWNER

While the 179D deduction is one of the largest available incentives for building owners and designers, there are a variety of other energy-related rebates and deductions available from other sources:

• Local utilites frequently offer rebates or reduced fee structures for buildings that incorporate energy demand reduction technology.
• Typically it's important to begin the process to claim these utility-based incentives prior to or immediately following construction.
• The US Department of Energy in conjunction with the North Carolina Solar center have created an excellent tool for determining possible incentives at the local, state, and federal level. The Database of State Incentives for Renewables & Efficiency (DSIRE) is available free of charge.
  
  DSIRE Link