Generally speaking, in order to qualify for the Business Energy Tax Credit, the original use of the system must begin with the taxpayer, or the system must be constructed by the taxpayer. It must also meet any performance standards in effect at the time the system is acquired (such as those set forth by the manufacturer). The equipment must also be operational during the year in which the tax credit is claimed in order for the taxpayer to earn the credit. This article provides a brief overview of the available credits for each qualifying type of technology:

Solar Power

The available credit is equal to 30 percent of expenditures on eligible solar property, which includes equipment that uses solar energy to generate electricity, to heat or cool (or provide hot water in) a structure, and hybrid solar lighting systems (defined as those that use solar energy to illuminate the interior of a structure using fiberoptic-distributed sunlight). There is no maximum credit limit.

Fuel Cells

By way of brief definition, fuel cells are basically large batteries that convert chemicals- like hydrogen and oxygen- into electricity without combustion. The available fuel cell credit is equal to 30 percent of the fuel cell’s cost. Although no maximum limit is set forth with respect to the amount of that cost, the fuel cell credit itself is capped at $1500 per .5 kilowatt of capacity that the fuel cell installation provides. Eligible equipment includes fuel cells with a minimum capacity of .5 kilowatts that have an electricity-only generation efficiency of 30 percent or higher.

Small Wind Turbines

The available credit is equal to 30 percent of the cost of the system, but is capped at $4000. “Small wind turbine” is defined as turbines that generate up to 100 kilowatts. Only turbines placed into service after October 3, 2008 (the date of the Bailout) are eligible for the credit.

Geothermal Installations

The available credit is equal to 10 percent of the cost of the system and there is no credit limit set forth in the text of the Act. Eligible geothermal property includes geothermal heat pumps and equipment used to produce, distribute, or use energy derived from a geothermal deposit. The credit also only applies to installations that are placed into service after October 3, 2008, however this particular credit has no stated expiration date under the Act.

Microturbines & Combined Heat and Power Systems

The available credit is equal to 10 percent of the cost of the system, but the credit is capped at $200 per kilowatt of capacity. Eligible installations are microturbines up to 2 megawatts in capacity. (Just as a brief aside, a microturbine is a piece of power generating equipment that captures the heat waste from its own turbines as it produces electricity and transforms the heat into usable energy. Microturbines are up to 80 percent efficient (at transforming the energy they consume into useable electricity) as compared to 30 to 35 percent for most types of power generating facilities.)

Similarly, a combined heat and power system uses natural gas to produce heat and electricity simultaneously. The available credit under the Bailout is equal to ten percent of the cost of a qualifying system, with no maximum limit stated. Eligible systems include those up to 50 megawatts in capacity that exceed 60 percent efficiency. (It’s not uncommon for a combined heat and power system to achieve up to 90 percent efficiency). The equipment must also be put into service after October 3, 2008 in order to qualify for the credit.

Again, it goes without saying that a taxpayer seeking to secure any of the aforementioned credits should consult both with an attorney and accountant.

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, 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.