Green Tax Tidbit: Energy-Efficient Building Deduction

The IRS has released interim guidance (Notice 2006-52), pending the release of regulations, describing how commercial building owners and leaseholders can qualify for the tax deduction under Code Section 179D by making their buildings energy efficient and established a process for certifying the energy savings required to claim the deduction. The Performance Rating Method (PRM) is required to be used to compute the percentage reductions in total annual energy and power costs. In all cases, the required percentage reductions must be accomplished solely through power and energy cost reductions for the heating and cooling, ventilation, hot water, and interior lighting systems, or in the building envelope. Any reductions in, for example, refrigeration, cooking, elevators, or receptacles are not included in these calculations.  If you have questions or comments regarding these calculations, please email me or comment and I can go into more detail. 

The property purchased must be certified to meet technical standards for energy and power cost reduction. The deduction for a particular building can be up to $1.80 per square foot (100,000 sq/ft building x $1.80 = $180,000 total tax deduction). Once that limit has been reached, whether in one tax year or over several years, there is no deduction for additional energy efficient expenses on that building unless you add additional square footage. The deduction can be claimed for the tax year in which property is placed in service (In the tax world "placed in service" means the date when the building starts to be used for its intended use).