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Energy Efficient Commercial Buildings Deduction

by Arthur J. McDaniel

On August 8, 2005, President Bush signed the Energy Policy Act of 2005. One of the provisions in that legislation was section 1331, which added section 179D to the Internal Revenue Code.

Under Code section 179D; a taxpayer may claim a deduction equal to his expenditures for energy-efficient commercial building property, for buildings placed in service during calendar years 2006 and 2007. Such property is defined as property,

which is installed on or in any building which is within the scope of Standard 90.1-2001,
which is installed as part of

the interior lighting systems,
the heating, cooling, ventilation, and hot water systems, or
the building envelope, and

that is certified as being installed as part of a plan to reduce energy expenditures by 50 percent or more in comparison to a reference building.

The deduction is limited to $1.80 per square foot, and is allowed in the year in which the building is placed in service. However, the interior lighting systems must achieve at least a 40 percent savings to qualify for the overall $1.80 per square foot deduction. If not, the $1.80 is reduced using a ratio formula in the Code section.

There also is a partial deduction available for buildings that do not meet the overall 50 percent savings test. That deduction applies to each of the systems listed above under paragraph (2) that meet the 50 percent savings test. Each of those deductions is limited to $.60 per square foot.
The deduction is akin to depreciation in that it also reduces the property basis, and is subject to recapture under Code sections 1245 and 1250.

The Treasury Secretary will promulgate regulations describing the method for calculating and verifying energy savings. Moreover, if the energy-efficient commercial building property is installed on or in a building owned by a Federal, State, or local government, the regulations will allow the deduction to the person responsible for designing the property.

DISCLAIMER

As provided in Treasury Department Circular 230, this article is not intended or written by Lobb Cliff & Lester, LLP to be used, and cannot be used, by a client or any other person or entity for the purpose of avoiding tax penalties that may be imposed on any taxpayer.

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