Energy-efficient commercial buildings deduction: new incentive for business owners and landlords.

The Energy Policy Tax Act of 2005 included incentives for taxpayers that make new or existing commercial property more energy efficient. Under new IRC section 179D, taxpayers that own or lease commercial buildings and install certain energy-efficient improvements therein after 2005 and before 2008 are eligible for an immediate deduction for the cost of those improvements. Notice 2006-52 set forth the process taxpayers must follow to claim this deduction.

ENERGY-EFFICIENT PROPERTY

To be eligible for the deduction, the commercial property must be:

1. Installed on or in any building located in the United States.

2. Installed as part of the:

* Interior lighting systems.

* Heating, cooling, ventilation or hot water systems.

* Building envelope (i.e., wall and roof assemblies, insulation, air/vapor retarders, windows, weather-stripping and caulking).

3. Certified as having reduced total annual energy and power costs by at least 50%.

DEDUCTION LIMITS

The maximum deduction cannot exceed $1.80 multiplied by the building's square footage, less the total of any prior-year's energy deductions already taken for the building. Square footage is measured from the exterior faces of exterior walls or from the centerline of walls separating buildings.

Partial deduction. Subject to certification (discussed below), a partial deduction may be available if one of the systems involved (i.e., interior lighting, heating, cooling, ventilation, hot water) reduces total annual energy and power costs by 16 2/3%; the maximum partial deduction available is 60 cents per square foot.

DETERMINING THE ENERGY REDUCTION

To compute the percentage reduction in total annual energy and power costs, a performance rating method is used. The reduction in costs attributable to interior lighting, heating, cooling, ventilation and hot water must be 50% below those of a comparable building (in the same climate zone) that meets certain minimum standards.

CERTIFICATION

A taxpayer that wishes to claim the deduction must receive certification from a "qualified individual." This is someone (not related to the taxpayer) who is a properly licensed engineer or contractor who provides, in writing, that he or she has the requisite qualifications to provide the required certification or to perform the needed inspection and testing.

Taxpayers are not required to attach the certification to their returns. However, they must maintain sufficient books and records to establish the qualification and amount of the deduction claimed, including the certifier's name, address and phone number; the building's address; a statement that the installed components meet the required reduction in energy costs; and the qualified computer software used to make the calculations.

For further discussion, see Tax Clinic, "Energy-Efficient Commercial Buildings Deduction Revisited," by Michelle Schuerman, CPA, in the April 2007 issue of The Tax Adviser.

--Lesli S. Laffie, editor

The Tax Adviser