5 features of tax deductions for energy efficiency


Authored by RSM US LLP

If your company owns or leases commercial buildings, and you have constructed or retrofitted the property to be more energy efficient, you may be eligible for an accelerated deduction for part of or all of the costs associated with the property.

In 2019, Congress and the president extended a number of tax credits and deductions through the Further Consolidated Appropriations Act, 2020, which included deductions (or credits) for energy-efficient commercial building properties through 2020.

Here are five features of the incentive to keep in mind if your company is considering incorporating the credits and deductions available in its strategic tax plans:

  1. The amount of the tax credit (or 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 total annual energy and power costs by 50 percent or more. The maximum deduction is $1.80 per building square foot. The taxpayer will get the deduction even if the energy savings result from one component. A partial deduction at 60 cents per square foot is available for each of the building systems meeting certain energy cost reduction thresholds below 50 percent.
  2. Incentives are available for three types of building systems components: Interior lighting systems; heating, ventilating and air conditioning, and hot-water systems. Incentives also cover the building envelope (the roof, exterior walls and floor of a structure) and parking garages (primarily through the lighting system). These incentives allow for the potential immediate expensing of costs that would otherwise be capitalized and depreciated over 39 years.
  3. Tax savings can go to property owners or their designers. When energy-efficient commercial building property is installed on or in a property owned by a federal, state or local government entity, an allocation of the deduction can be made to the designer or designers primarily responsible for designing the property in lieu of the property owner. The designers could include the architect, engineer, contractor, environmental consultant or energy services provider—in other words, everyone from the general designer to subcontractors—who created the technical specifications for making the building energy efficient. The tax credit assigned may be allocated to the primary designer or split among multiple designers on the project.
  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 tax returns from the last two years.
  5. Software and engineer must be approved. Companies or their vendors must use modeling software preapproved by the Department of Energy when determining the energy savings. A certified engineer licensed to operate in the building’s jurisdiction will also need to review the complete report before the deduction is taken on a tax return.

Given its history of multiple extensions, section 179D is expected to be extended beyond 2020 but this, of course, remains to be seen. Companies that have facilities eligible for these deductions or credits will want to act now to take advantage of the opportunity for tax savings and increased cash flow.