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New Tax Deduction for Commercial Building Owners

The Energy Tax Incentives Act passed at the end of 2005 provides a wide array of new tax breaks for a diverse group of taxpayers. For the most part, the media has focused on energy-saving devices in the home and the tax credits for certain motor vehicles. However, the new energy law is not strictly limited to individual homeowners and car owners—businesses may also be in line for tax savings.

Prime example: One of the most widely applicable provisions for business entities in the new law authorizes a brand-new deduction for improvements to commercial property. Generally, the deduction is equal to $1.80 per building square foot less the aggregate amount of any energy-efficient building deductions allowed in prior years. (The deduction is reduced to 60 cents per building square foot for certain improvements.)

Unlike many other provisions in the new law, there is no overall dollar cap on the annual deduction. Thus, the new law creates a powerful tax incentive to upgrade existing buildings, especially for large manufacturing concerns. The deduction applies to energy-saving property placed in service after 2005 and before 2008.

However, the new law establishes some stringent criteria to qualify for the deduction. Specifically, the following four requirements must be met:

1. The property must otherwise be depreciable or amortizable.

2. The property must be installed on or in a building in the United States that meets Standard 90.1-2001 of the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America (ASHRAE/IESNA).

3. The property is installed as part of the interior lighting systems; the heating, cooling, ventilation or hot-air systems; or the building envelope.

4. The property is certified as a part of an overall plan designed to reduce the total annual energy and power costs by 50% or more in comparison to a reference building meeting the minimum requirements of Standard 90.1-2001.

Note: A partial deduction for a separate building system may be allowed if a building does not meet the fourth requirement for generating 50% energy savings. The system, however, must be certified as meeting energy-efficient building standards. The partial deduction is equal to 60 cents per square foot for each separate system. For this purpose, a “separate system” includes the interior lighting; the heating, cooling, ventilation and hot-water systems; and the building envelope.

The IRS will establish precise certification procedures and methods for calculating energy consumption in forthcoming regulations. The certification process will include rules for inspection and testing by qualified individuals recognized by an organization certified to ensure compliance of energy saving for buildings. A professional tax adviser can provide more insight into these procedures and methods.

It is not clear from the new law whether the tax breaks for commercial buildings will be available to lessees. Future guidance from the IRS is expected to clarify this issue. We will keep you updated on any significant developments.

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	[ return to list ] New Tax Deduction for Commercial Building Owners The Energy Tax Incentives Act passed at the end of 2005 provides a wide array of new tax breaks for a diverse group of taxpayers. For the most part, the media has focused on energy-saving devices in the home and the tax credits for certain motor vehicles. However, the new energy law is not strictly limited to individual homeowners and car owners—businesses may also be in line for tax savings. Prime example: One of the most widely applicable provisions for business entities in the new law authorizes a brand-new deduction for improvements to commercial property. Generally, the deduction is equal to $1.80 per building square foot less the aggregate amount of any energy-efficient building deductions allowed in prior years. (The deduction is reduced to 60 cents per building square foot for certain improvements.) Unlike many other provisions in the new law, there is no overall dollar cap on the annual deduction. Thus, the new law creates a powerful tax incentive to upgrade existing buildings, especially for large manufacturing concerns. The deduction applies to energy-saving property placed in service after 2005 and before 2008. However, the new law establishes some stringent criteria to qualify for the deduction. Specifically, the following four requirements must be met: 1. The property must otherwise be depreciable or amortizable. 2. The property must be installed on or in a building in the United States that meets Standard 90.1-2001 of the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America (ASHRAE/IESNA). 3. The property is installed as part of the interior lighting systems; the heating, cooling, ventilation or hot-air systems; or the building envelope. 4. The property is certified as a part of an overall plan designed to reduce the total annual energy and power costs by 50% or more in comparison to a reference building meeting the minimum requirements of Standard 90.1-2001. Note: A partial deduction for a separate building system may be allowed if a building does not meet the fourth requirement for generating 50% energy savings. The system, however, must be certified as meeting energy-efficient building standards. The partial deduction is equal to 60 cents per square foot for each separate system. For this purpose, a “separate system” includes the interior lighting; the heating, cooling, ventilation and hot-water systems; and the building envelope. The IRS will establish precise certification procedures and methods for calculating energy consumption in forthcoming regulations. The certification process will include rules for inspection and testing by qualified individuals recognized by an organization certified to ensure compliance of energy saving for buildings. A professional tax adviser can provide more insight into these procedures and methods. It is not clear from the new law whether the tax breaks for commercial buildings will be available to lessees. Future guidance from the IRS is expected to clarify this issue. We will keep you updated on any significant developments. [ return to list ]
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