We caught up with Brian Crowley to discuss how commercial property owners can obtain federal income tax deductions for energy improvements to both new and existing buildings.
Can you tell our readers about federal tax deductions based on energy improvements?
This is specifically related to commercial buildings and the Energy Policy Act of 2005 as approved by Congress. In the Energy Policy Act, there are certain tax deductions and allowances for property owners whose properties consume a substantial amount of energy. These packages are intended to stimulate the growth of energy-efficient building practices (i.e. green and LEED building). The key areas that are applicable to it primarily relate to energy use in HVAC systems, water systems, and lighting.
How much can a commercial building receive in deductions?
The federal government will give a deduction to the maximum of $1.80 per square foot for the cost of construction for these upgraded systems, or for the retrofit of existing buildings. They can also apply for individual deductions as they pertain to the building envelope, HVAC systems, and lighting. Individually, they can qualify up to $.60 per foot per system, which is how you get the $1.80 per square foot. The savings will reflect as an adjustment to the client’s income taxes. In order to be eligible for the full deduction, the building owner must make investments designed to reduce energy costs by at least 50 percent. In addition, the deduction only applies to commercial, income-producing buildings. These tax deductions are allowable for an array of owners and property types, such as REITS and Hedge Funds
How does an owner apply for these deductions?
Under section 179 D of the IRS tax code, they would have to justify the percentage of energy savings. If they hit over 50 percent, they get the maximum allowance. In order to claim the deduction, they would need a third party engineering firm to certify that the savings are actually there. Our firm, Engineered Tax Services, Inc., is currently the only firm in the country that has IRS approval to conduct such a study and file the necessary IRS documentation.
The whole process would go something like this: The building owner installs an energy savings system either in new construction or a retrofit. They then have the engineering firm come in and take an energy audit of the property. The engineering firm evaluates what has been used, what will be used, and what the amount of savings will be. The firm would substantiate those statements with a detailed engineering report certified by a licensed engineer, and they would then prepare all of the taxation documentation that the IRS requires. The deduction is classified as an additional expenditure on the owner’s taxes, thus reducing the base of his or her income tax. It is particularly beneficial when you’re dealing with properties of $2 million and above, because the cost of the report starts at approximately $15,000.
What are some common upgrades that are addressed?
The most common energy issue that we come across for the retrofit of an existing building is outdated lighting technology. The lighting technology may be five or 10 years old and burning a lot of energy on a monthly basis. What we do, is we will work with lighting companies and electrical engineers to alert the property owner to the benefits of doing a retrofit. The tax deductions are really an incentive for them to ease the pain of the up-front costs and get them into the upgraded system. That is based on a pretty sophisticated IRS guideline, based on ASHRE standards 2001. ASHRE is a governing association body that HVAC and energy companies use, and it has to meet certain standards.
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