Tax Deduction For Energy Efficiency Projects

According to the Department of Energy, energy usage in commercial buildings continues to increase.  It comes as no surprise that building owners are seeking ways to decrease their electric utility bills through energy efficiency measures.  In addition to reduced electric bills, a tax code provision makes energy efficiency projects even more beneficial. 

Background on Section 179D

Section 179D of the tax code provides a deduction for installation of “energy efficiency commercial building property” (“Eligible Property”).  Eligible Property includes property involved with improving energy efficiency of:

  • interior lighting systems;
  • heating, cooling, ventilation, and hot water systems; or
  • building envelopes.

The deduction amount is equal to the cost of Eligible Property, subject to a maximum of $1.80 per square foot.   In addition, installation of Eligible Property must result in a minimum percentage of energy savings.

 In certain circumstances, however, Eligible Property that does not meet the minimum energy-savings percentage may still qualify for a tax deduction.  The partial deduction is limited to $0.60 per square foot.

Recent Guidance

The IRS recently modified guidance for these partial deduction projects in Notice 2012-22.  The Notice provides an additional set of energy savings percentages that, if met, will qualify a project for a partial Section 179D deduction.

While the guidance increases the energy-savings percentage for interior lighting systems, it reduced the percentage for heating, cooling, ventilation, and hot water systems.  The percentage for building envelopes stayed the same.  A chart is provided on page 7 of the Notice for quick reference.

Implications

Owners and facilities managers should consider the Section 179D deduction as an additional incentive to implement their energy efficiency projects.  Furthermore, architects and design-builders may even qualify for the deduction for energy efficiency projects on public buildings.  Whoever gets the deduction, they should get started soon: the Section 179D deduction will sunset on December 31, 2013.

For additional resources on energy efficiency projects, click here.

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