I had the pleasure earlier today of leading a conference call with Studley to review provisions of the Emergency Economic Stabilization Act of 2008 (the formal title for the $700 federal bailout that was passed back on October 3, referred to herein as the Bailout) relating to energy efficiency in commercial office buildings. Most of the applicable provisions of the Bailout actually extend existing tax deductions and credits, though it does provide additional incentives that I will detail in a subsequent post.
Perhaps the most critical provision for commercial owners, operators, and tenants to note is the Energy Efficient Commercial Buildings Tax Deduction, which was enacted back in 2005 as Section 179D of the 2005 Energy Policy Act. Prior to the Bailout, Section 179D was slated to expire at the end of 2008, but has now been extended through December 13, 2013. In this article, I will review Section 179D in detail. A subsequent post will detail the Bailout’s significant expansion of the Business Energy Tax Credit that was previously enacted as Section 48 of the 2005 Energy Policy Act.
It is critical at the outset to note the distinction between a tax deduction (an offset of the total amount of taxable income that a taxpayer has in a given year) and a tax credit (which is a dollar amount applied against the total amount of tax that is owed for a given taxable year). Section 179D provides a tax deduction of between .30 cents and $1.80 per square foot (depending on the type of technology that is being installed) for owners of both new and existing buildings (and also lessees who make qualifying expenditures) that install (1) interior lighting systems, (2) building envelope improvements, or (3) HVAC systems that reduce the building’s total power and energy costs by 50 percent or more compared to the ASHRAE 90.1 baseline. Note the significant implications here of how a tenant’s lease is structured in terms of whether it will choose to make any qualifying expenditures- I will discuss much more about this critical issue in subsequent posts here at GRELJ.
Examples of the types of equipment that will qualify under Section 179D include water heaters, lighting controls or sensors, chillers, furnaces, boilers, heat pumps, air conditioners, Ductless air conditioners, also known as a mini-split air conditioner, are heat and cool each room individually., cogeneration facilities, caulking and weather-stripping, duct/air sealing, building insulation, and even efficiency upgrades to windows, doors, siding, and roofs. Tenants in particular should note that a .60 cent per square foot deduction is also available for individual installations that would “reasonably contribute” to an overall building savings of 50 percent if other systems were installed as well (even if they are not).
In order to prove that the required reductions are met, the installations must be certified by a “qualified individual,” who is defined as a party that is not related to the taxpayer and is a licensed contractor or engineer in the jurisdiction in which the building is located. Taxpayers are not required to attach the certification to their tax returns, but must retain sufficient books and records to establish entitlement to the amount of any deduction that’s being claimed for the given taxable year. As we have discussed extensively at gbNYC, note the potential professional liability insurance policy implications for design professionals who make this certification absent sufficient protective language in their agreements with the taxpayer.
This target reduction in annual power and energy costs to which the “qualified individual” must certify is calculated using the performance rating method. An ASHRAE 90.1 baseline building is used as a standard and compared to the taxpayer’s building. The reference building must be in same climate zone and otherwise comparable to the taxpayer’s building, but all building systems must meet the minimum requirements of ASHRAE 90.1. The percentage reduction in energy and power costs is determined by subtracting the proposed building annual energy and power costs from the reference building annual energy and power costs, and then dividing the difference by the reference building costs.
The maximum deduction allowed cannot exceed $1.80 times the building’s square footage, less the aggregate of any previous deductions taken for the same building under Section 179D. Critically, if multiple taxpayers (i.e. tenants) install qualifying energy efficient equipment in the same building, the maximum deduction taken by all those taxpayers cannot exceed the $1.80 times the building’s square footage amount.
A building’s square footage is defined as all interior conditioned areas with headroom height greater than 7.5 feet. Excluded spaces from the square footage calculation include covered walkways, porches, or exterior terraces.
A final caveat- the tax code is incredibly complicated and it is critical for any taxpayer seeking to claim any of the deductions described herein to consult both with an attorney, as well as their accountant.