IRS Eases Energy Efficient Deduction Threshold
For several years, the tax code has allowed a first-year deduction for energy efficient investments in new or rehabilitated commercial buildings. But on February 24, 2012, the IRS issued Notice 2012-22, which modifies the deductible percentages.
“This provision can be powerful because it allows a first-year deduction for portions of a building that otherwise would be depreciated over 39 years,” says Mike Noyes, a senior manager with CliftonLarsonAllen. “And with the recently liberalized IRS guidance, we’ll find more taxpayers who can take advantage of this write-off.”
This change may be particularly important to architects and designers of government buildings, which allocates the deduction to the designer if the building is owned by a federal, state, or local, governmental entity that cannot take advantage of the deduction.
Details on the deduction
Section 179D allows an immediate first year tax deduction for specific energy-efficient portions of a new or remodeled commercial building. This includes:
- Interior lighting systems
- Heating, cooling, ventilation, and hot water systems (HVAC)
- The building envelope (i.e., insulation, doors, and windows)
To claim the deduction, these building components must be tested and certified as attaining specific savings compared to a 2001 federal energy standard.
If the overall components attain a 50 percent energy savings compared to the standard, a maximum deduction is allowed, (limited to $1.80 per square foot). Partial deductions are allowed for any one of the three systems that reach a required percentage of savings, with the deduction for each system capped at $.60 per square foot.
“In the early days of this credit, it was not common to see buildings that qualified,” says Perry McGowan, a construction and real estate manager with CliftonLarsonAllen. “But with improved energy efficiency technologies, and state and local building codes increasingly raising the energy standards, the deductions are more readily attainable, especially with lighting systems.”
Liberalized IRS guidance
The recent IRS guidance provides an alternative set of energy efficient percentage thresholds of 25 percent for the interior lighting, 15 percent for the HVAC systems, and 10 percent for the building envelope. These new percentages are effective for buildings placed into service after March 11, 2012, and remain in place through 2013. Taxpayers are permitted to utilize either the former percentages or the new percentages for any building improvements or new construction placed in service during this period. “With two sets of percentages available, we will be able to qualify more buildings or building components as eligible for this first-year deduction,” notes Noyes.
Applying it to existing or future projects
Projects that are on the drawing board should take into account the new energy performance percentage requirements. And buildings that are being completed now or during 2012-2013 should consider the first-year deduction.
“To make an assessment cost effective, a building should be 25,000 – 50,000 square feet in most cases,” says McGowan. “But our construction and energy improvement experts can discuss the threshold and the merits of pursuing this deduction.”
Bob Sniegowski, an engineer and tax principal with CliftonLarsonAllen notes, “hotels and parking garages are buildings where the rules are more favorable, and can make sense to certify.”
How we can help
For consultation on the merits of a Section 179D energy efficient commercial building deduction, contact a CliftonLarsonAllen tax professional.
Mike Noyes, Construction and Real Estate Senior Manager
firstname.lastname@example.org or 303-265-7999
Perry McGowan, Construction and Real Estate Manager
email@example.com or 612-376-4632
Bob Sniegowski, Construction and Real Estate Principal
firstname.lastname@example.org or 612-376-4659