Save on operating costs, then save taxes too!

If you can trust the news these days, everybody is incensed by taxes. They are either too high or the wrong things are being taxed. Well here's some tax news that should be more agreeable: a tax deduction for making your building more energy efficient.

Regarding the roof, these days ASHRAE says that R=20 is the minimum. And LEED says R=30 for commercial flat roofs is the minimum. Those are twice what most owners have been doing. Some tenants are demanding these standards. So take a look. If we have to do it anyway for marketing purposes, to save money or just to be good citizens, you'll need to know about these Energy Efficiency Tax Deductions.

Summary of IRS Guidelines for the Commercial Building Energy Efficiency Tax Deduction Outlined in the Energy Policy Act of 2005

The IRS has issued guidance for claiming the deduction for energy efficient commercial buildings as outlined in the Federal Energy Policy Act of 2005. The process as outlined allows a taxpayer who owns a commercial building and installs property (e.g. roofing) as part of the building envelope to obtain a certification that the property satisfies the energy efficiency requirements of the bill.

Qualifying Timeframe

In general, the bill allows a deduction for part of all of the cost of energy efficient building property that the taxpayer places in service between December 31, 2005 and December 31, 2013*. The building must be within the U.S. and must meet the requirements of ASHRAE Standard 90.1-2001.

*Note: The revised expiration date of January 1, 2009 was extended with The Emergency Economic Stabilization Act of 2008.

Deduction Amounts

The bill allows a deduction for property installed as part of the lighting, HVAC, hot water and building envelope that reduces the total annual energy and power costs of the combined systems by 50 percent or more. The total combined deduction cannot exceed $1.80 per square foot of the building.

The bill also allows a deduction for partially qualifying commercial building property that is energy efficient but fails to achieve the 50 percent reduction in total energy and power costs. A partial deduction is allowed with respect to each separate building system. The IRS modified the target reductions in March 2008 to the following:

1. Interior lighting   20%
2. HVAC and hot water   20%
3. Building envelope   10%

Energy efficient building envelope property is partially qualifying if it is installed and certified to reduce the total annual energy and power costs by 10 percent or more as compared to a reference building that meets Standard 90.1-2001. The maximum amount of deduction for partially qualifying property is $0.60 per square foot of the building.

Cost Savings Calculations

The Performance Rating Method (PRM) must be used to calculate the percentage reduction. Calculations are based on a reference building that is located in the same climate zone as the taxpayer's building and contains the new building envelope that has been incorporated but is otherwise identical to the reference building. The Department of Energy maintains a list of qualified software that may be used to calculate energy and power costs for certification.

Certifications

Before a taxpayer may claim the deduction, the taxpayer must obtain a certification provided by a qualified individual. The taxpayer is not required to attach the certification to the tax return, but the taxpayer must maintain proper books and records to establish the entitlement. A qualified individual: 1) is not related to the taxpayer claiming the deduction, 2) is an engineer or contractor that is properly licensed as a professional engineer or contractor in the jurisdiction in which the building is located and 3) has represented in writing to the taxpayer that he or she has the requisite qualifications.

A certification must contain:

1. The name, address, and telephone number of the qualified individual.
2. The address of the building to which the certification applies.
3. One of five statements (as outlined by the IRS) explaining the manner in which the building envelope property satisfies energy efficiency requirements.