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Commercial-Building Tax Credits for Energy Efficiency
Energy Policy Act of 2005
Summary of Commercial Tax Credits
A tax deduction of up to $1.80 per square foot is available to owners or tenants (or designers, in the case of government-owned buildings) of new or existing commercial buildings that are constructed or reconstructed to save at least 50 percent of the heating, cooling, ventilation, water-heating, and interior-lighting energy costs of a building that meets American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) Standard
90.1-2004.
Only buildings covered by the scope of ASHRAE Standard 90.1-2004 are eligible.
Partial deductions of $.60 per square foot can be taken for improvements to one of three building systems:
- Building envelope
- Lighting
- Heating and cooling system
The total heating, cooling, ventilation, water-heating and interior-lighting energy use is reduced by 16-2/3 percent (16-2/3 percent is the 50 percent goal for the three systems spread equally over the three systems). See below.
Eligibility
The person (or organization) who makes the expenditures for construction is generally the recipient of the allowed tax deductions. This is usually the building owner, but for some HVAC or lighting-efficiency projects, it could be
the tenant.
The builder (or designer, in the case of publicly owned buildings) can take the deduction in the year the property was placed in service. The building or system must be certified, with inspection and testing, as meeting the energy cost-saving goal according to guidance issued by the IRS in consultation with the Department of Energy (a link to this guidance is provided below). Key provisions in the guidance include the following:
- Certifications must be done by “qualified individuals.” Qualified individuals must be licensed engineers or contractors, must not be “related” to the taxpayer taking the deduction (as defined by the IRS), and must self-certify to the taxpayer that he or she has qualifications to provide the certification.
- Certifications for energy savings shall be in accordance with the procedures in Appendix G of ASHRAE Standard 90.1-2004. Please refer to www.realread.com/prst/pageview/browse.cgi?book=1931862664.
- Generally calculations will be done by computer software. Software must be on a list of products approved by the U.S. Department of Energy that is available at www.eere.energy.gov/buildings/info/tax_credit_2006.html.
- The certification must include a field inspection of the building after the building is placed in service, to confirm that the building has met the savings goals. Specific inspection and testing procedures are being developed by the National Renewable Energy Laboratory and will be posted on the Web when completed.
- Certifiers must also provide the building owner with an explanation and list of the energy-efficiency features of the building and the projected annual energy costs.
Until the IRS issues a final rule, the law for lighting systems specifies that a deduction of $0.30 per square foot can be taken if the lighting system employs dual switching (ability to switch roughly half the lights off and still have fairly uniform light distribution) and reduces installed lighting power by at least 25 percent from values specified in specifically cited tables in ASHRAE Standard 90.1-2001. As lighting-power reductions climb from 25 percent to 40 percent, the deduction is increased proportionally, up to $0.60 for a 40 percent power reduction (plus dual switching). This prorated credit does not apply to warehouse lighting.
For more information on the commercial-lighting tax incentive, see:
Qualifying for the Incentives
Follow the guidance issued by the IRS – a link is provided below. The taxpayer will need to know the square footage of the building (the IRS guidance explains how to calculate this), when the building was placed in service, and have a certification from a qualified individual stating which targets have been met (50 percent savings for three systems or 16-2/3 percent savings for one system).
Qualifying Technologies and Designs
For IRS guidance:
Additional information is available on approved software programs and the NREL guide to inspections at:
For design advice concerning how to meet whole building savings goals, consult the following Web sites:
For information on qualifying lighting systems:
For additional information on commercial-building tax deductions:
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