5 features of tax deductions for energy efficiency

ARTICLE | June 29, 2021

Authored by RSM US LLP

Green buildings, energy-efficient developments, and corporate sustainability top the lists for real estate investors and their environmentally friendly tenants. Increasingly, investors seek out projects that not only show strong returns, but also provide a positive impact on the environment. 

If your company owns or leases commercial buildings, and constructs or retrofits the property with more energy-efficient property, you may qualify for an accelerated deduction for part or all of the costs associated with the property.

In 2021, Congress and the President made deductions related to energy-efficient commercial building property permanent through the Consolidated Appropriations Act, 2021.

Five features of the incentive to keep in mind when a company considers incorporating the deduction for energy-efficient commercial building property into a strategic tax plan include the following:

  1. The amount of the tax deduction depends on the size of the building and the components involved. The building, which must be located in the United States, qualifies for the deduction when the energy-efficient properties reduce the total annual energy and power costs by 50 percent or more. The maximum deduction equals $1.80 per building square foot. A company qualifies for the deduction even if the energy savings result from one component. Each of the building systems that meets certain energy cost reduction thresholds below 50 percent may qualify for a partial deduction of 60 cents per square foot and thus, a total possible deduction of $1.20 per square foot.
  2. Three types of building systems components qualify for the incentive: Interior lighting systems; heating, cooling, ventilation, and hot-water systems; and the building envelope (the insulation, exterior doors and windows, and roof, etc.) Parking garages can also be eligible (primarily through the interior lighting system). These incentives allow for the potential immediate expensing of costs that a company might otherwise capitalize and depreciate over 39 years.
  3. Tax savings can go to designers of government-owned buildings. The person primarily responsible for the design of energy-efficient commercial building property installed on or in a property owned by a federal, state or local government entity may receive an allocation of the deduction from the owner of the property. A designer creates the technical specifications for installation of energy-efficient commercial building property. A designer may include an architect, engineer, contractor, environmental consultant or energy services provider who created the technical specifications for making the building energy-efficient. At the owner’s discretion, the owner may allocate the deduction among several designers.
  4. Owners can evaluate prior tax returns. In the search for eligible properties, owners can review tax returns as far back as 2006 and receive deductions for qualified properties for the current year. Designers, however, are limited to reviewing open tax years.
  5. Software and engineer/contractor must be approved. 1.    Companies or their vendors must use modeling software preapproved by the Department of Energy when determining the energy savings. A professional engineer licensed in the state or a contractor licensed to operate in the building’s jurisdiction must perform a site visit and certify the energy savings before a company may claim the deduction on a tax return.

Companies with facilities eligible for these deductions will want to act now to take advantage of the opportunity for tax savings and increase cash flow.

This article was originally published on March 4, 2020, and has been updated.

This article was written by Christian Wood and originally appeared on Jun 29, 2021.
2022 RSM US LLP. All rights reserved.

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

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