You hear a lot about “going green” these days. Companies promote environmentally conscious programs and policies to win over new customers, improve their public image, and reduce costs. Another major benefit of “going green” through energy efficient improvements is the considerable amount of tax savings to be had. Thanks to section 179D, first enacted under the Energy Policy Act of 2005, building owners, architects and designers are able to expand and diversify their tax savings through the immediate tax deduction of an energy-efficient property.
What is section 179D?
Formally known as the Deduction for Energy Efficient Commercial Buildings, section 179D is applicable to buildings constructed or renovated from January 1, 2006 through December 31, 2014. Although 179D hasn’t yet been renewed for projects completed in 2015, there are discussions in Congress which aim to further extend the duration of this energy-efficient deduction. Deductions may be captured retroactively as well, through the use of a 3115 Change in Accounting Method without the need to amend tax returns.
Focused energy studies provide property owners, architects and the design teams behind energy-efficient construction and renovation with the opportunity to claim potentially significant tax deductions. Applicable candidates may claim deductions of up to $1.80 per square foot based on energy efficiency in three building system areas – interior lighting, HVAC, and building envelope. The deduction can be claimed immediately upon project completion, which is far more beneficial than depreciating the amount over a number of years.
The goal of 179D is to incentivize energy efficiency by providing an immediate reward to companies that “go green”. Section 179D is somewhat unique among tax-saving strategies, in that it seeks to reward outcomes and is not particular about methods. Companies are free to implement energy efficient improvements of their choice, with the proviso that the improvement meets the benchmarks established by the ASHRAE 90.1 2001 building energy code.
What is Eligible?
Not every project qualifies for tax savings under section 179D. The primary qualification is that the project must be commercial. Single-family homes don’t qualify for the deductions, nor do multi-family homes with fewer than four stories. Buildings owned or used by tax-exempt religious organizations aren’t eligible for section 179D, but buildings owned by government entities or public organizations, such as public schools, are eligible. In such a case the architect or design firm responsible for the energy-efficient upgrades would claim the related deductions.
To qualify for the maximum deduction, the improvements to interior lighting, HVAC, or building envelope must increase energy efficiency by at least 50 percent of the standards set by ASHRAE 90.1 2001. Smaller deductions may also be claimed if the scope of the upgrades was limited. For example, if the upgrades only focused on the HVAC system, the property owners may be able to claim a deduction of 60 cents per square foot. If there were improvements in the energy efficiency of a building’s interior lighting, the owners may claim a deduction ranging from 30 to 60 cents per square foot, depending on the extent of the upgrades. Buildings that qualify for the 179D deduction need to be inspected and certified by a professional contractor or engineer who is based in the same jurisdiction as the property. The third-party inspector must be completely independent of the property owner, with no personal interest in any potential tax savings that may result.
The benefits of energy efficient improvements are multifaceted. Reducing energy expenditure helps the environment, creates tax savings, and lowers subsequent building-operating costs. Building owners will continue to save money on a monthly basis as their energy bills are significantly reduced. Capstan’s commitment to 179D studies are part of our dedication to the “triple bottom line,” promoting profit while remaining mindful of the wellbeing of people and our planet.
The Capstan team can help you determine if your project is eligible for 179D tax savings or if another of our featured services might be applicable. Contact us today to learn more.