Tax Incentive Strategies

A little-known provision of the tax code allows those who make buildings more energy-efficient to increase their profits dramatically — if they obtain the proper certification.  Section 179D (also known as EPAct) allows owners or designers of an energy-efficient building to take a deduction of as much as $1.80 per square foot in the year the project goes into service.

Background – In the past several years, Congress and recent administrations have placed a huge emphasis on green building initiatives. In order to counter problems that we are facing in energy, Congress passed the Energy Policy Act (EPAct) of 2005 that created a tax incentive that relates to the design and installation of energy efficient interior lighting, HVAC, hot water, or building envelope systems.  These types of projects can yield as much as $1.80 /sf, in deductions.  The total maximum available deduction is a factor of the eligible square footage so for example: a building portfolio total sq ft area of 50,000 would equal a max deduction of $90,000 and a 250,000 sq ft portfolio would equal a max of $450,000 in deduction and so on.

The deduction is available for reductions in the energy usage of these systems:

  • Building envelope
  • HVAC/hot water systems
  • Interior lighting systems

The maximum deduction is given to projects that reduce their total energy costs by 50 percent or more. Failing that, there are subsystem deductions for significant energy savings: $.60 per square foot for the building envelope or the HVAC/hot water systems, and from $.30-.60 per square foot for lighting, depending upon the method used for qualifying the lighting system deduction.

The percentage of energy efficiency that earns the deduction depends on the year that a building is placed in service, as the following chart shows:

Property Under IRS Notice 2006-52 Under IRS Notice 2008-40
Lighting (Interim rule) 25-40% LPD reduction 25-40% LPD reduction
Lighting (Permanent rule) 16 2/3% energy cost reduction 20% energy cost reduction
HVAC/hot water 16 2/3% energy cost reduction 20% energy cost reduction
Building envelope 16 2/3% energy cost reduction 20% energy cost reduction
Lighting + HVAC/HW + envelope 50% energy cost reduction 50% energy cost reduction
Effective dates 1/1/2006 – 12/31/2008 1/1/2006 – 12/31/2013

To claim the deduction, a building’s owner or designer must have the energy savings certified by an independent third-party.  The deduction is available for both new buildings and retrofits. It’s technology-neutral — not favoring any particular means of reducing energy use in a building system.

If the building is a government-owned property, such as a school or library, the government entity can allocate the deduction to one or more designers of the project. “Designer” is defined as anyone who creates the technical specifications for installing the qualifying property and its subsystems; it can include architects, engineers, contractors, environmental consultants, energy services companies (ESCOs) or others. The designer receives the deduction’s benefit — and the government entity receives the continuing benefit of lower energy costs as well as other immediate benefits.

There are various criteria to be considered when exploring any of these tax incentives and a very large number of private and public entities are taking full advantage of this revenue generating tool. Please contact TFS Alliance Group for a free and brief consultation to learn if you are a candidate and what the next steps would be.