Energy Efficient Commercial Buildings Deduction
What is it?
The Energy Efficient Commercial Buildings Deduction is intended to give a tax break to individuals that significantly improve the energy efficiency of commercial buildings. To qualify for the deduction, the building must be located in the United States and meet benchmark standards for commercial building energy codes.
The improvements must be depreciable and installed as part of:
- The interior lighting systems.
- The heating, cooling, ventilation, or hot water systems, or the building envelope.
- The improvements must be part of a plan that reduces the total energy and power costs by 25% or more (if under 25%, no deduction is allowed).
Who is eligible?
Owner(s) of a qualified commercial building (a high-rise residential building that is at least 4 stories tall also counts) or designer(s) of energy efficient commercial building property owned by certain tax-exempt entities (U.S. government entities, Indian tribal governments, Alaska Native Corporations, tax-exempt organizations). Real estate investment trusts (REITs) also qualify.
Who gets the deduction?
If the commercial building is owned by an individual or REIT, that individual or REIT gets the deduction. If an energy efficient commercial building is owned by a government or non-profit entity, the designer of the energy efficient commercial building property claims the deduction.
How does it work?
- The calculation of the deduction depends on when the building was placed in service.
- If the building was placed in service during or after 2023, the deduction is the lesser of the cost of the property that was installed or the savings per square foot (calculated as $0.50 per square foot for a building with 25% energy savings. Add $0.02 per square foot for each percentage point of energy savings above 25%. The maximum is $1.00 per square foot if the building reaches 50% energy savings). Additionally, if wage and apprenticeship requirements are met, the deduction can increase to up to $5.00 per square foot.
- If the building was placed into service during or before 2022, the deduction is limited to $1.80 per square foot (indexed for inflation after 2020) for buildings that reach 50% energy savings. There is a partial deduction available for some property.
Does the amount we take for 179D deduction need to reduce our basis in a building?
If a 179D deduction is taken, the basis of the building is reduced by the amount of the deduction taken. When the building is later sold, the deduction must be recaptured as if it were a depreciation expense taken from the building under the IRC Section 1245 rules.
Questions? Reach out to our Tax Incentives and Credits Project Manager, Sandra D Bullock, for more information sandradb@squire.com
Sources:
https://www.irs.gov/pub/irs-drop/a-24-24.pdf
https://www.irs.gov/credits-deductions/energy-efficient-commercial-buildings-deduction