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Energy Policy Act Can Create $1.80 per Sq. Ft. Benefit To Your Client

Real estate Investors may be eligible for a a substantial tax deduction of up to $1.80 per square foot for improving the energy efficiency of their existing commercial buildings or designing energy efficiency into their new buildings.

The Energy Policy Act of 2005 is a very important new tax act for building owners. Real estate investors can now reduce the payback period in investing in energy-efficient components with the added benefit of deducting up to the entire expense of these assets immediately versus depreciating these assets over 39 years.

The Energy Policy Act of 2005 includes a tax deduction for investments in “energy-efficient commercial building property” designed to significantly reduce the heating, cooling, water heating, and interior lighting energy cost of newer existing commercial buildings. To be eligible, the energy-efficient commercial building property must be placed in service between January 1, 2006 and December 31, 2008.

To qualify for the full deduction, a building owner or tenant must make investments designed to reduce energy costs by 50% or more. A partial deduction of $0.60 per square foot is available for investments in one of three systems—lighting; heating and cooling; or building envelope— designed to reduce energy costs by 16 and 2/3% (i.e., one-third of the 50% requirement).

Tax deductions reduce your clients overall taxable income with the value of the deduction dependent on their tax bracket.

How Can I Qualify My Client For The Tax Deduction?

There are five alternative ways a building system(s) may qualify. Before a taxpayer may claim the section 179D deduction with respect to property installed on or in a commercial building, the taxpayer must obtain a certification with respect to the property. The certification must be provided by a qualified individual and satisfy the requirements of section 179D(c)(1). The five alternative ways to qualify a building are listed below:

1. The whole building may qualify for up to $1.80 per square foot; or

2. Lighting systems; or

3. HVAC/water heating; or

4. Building envelope may each qualify for up to a $0.60 per square foot deduction for their contribution to the 50 percent savings (defined by the Internal Revenue Service as 16 2/3% whole buildings savings); or

5. Lighting may receive an up to a $0.30 to $0.60 deduction for reductions in lighting power density from ASHRAE 90.1-2001 tabular values of 25 percent to 40 percent respectively, with linear interpolation between 25 and 40 percent.

Please contact Julio Gonzalez with Engineered Tax Services at jgonzalez@engineeredtaxservices.com if for further insights.