New Guidance Issued March 2008, Click Here for Details

Business Tax Incentives

Commercial Buildings

What is the tax incentive for commercial buildings?

A tax deduction of up to $1.80 per square foot is available to owners or tenants (or designers, in the case of government-owned buildings) of new or existing commercial buildings that are constructed or reconstructed to save at least 50% of the heating, cooling, ventilation, water heating, and interior lighting energy cost of a building that meets ASHRAE Standard 90.1-2001. Only buildings covered by the scope of ASHRAE Standard 90.1-2001 are eligible. Partial deductions of $.60 per square foot can be taken for improvements to one of three building systems that reduce total heating, cooling, ventilation, water heating and interior lighting energy use by a certain percentage—the building envelope (10%), lighting (20%), or heating and cooling system (20%). An interim system-specific goal for lighting is provided directly in the legislation and is valid until the IRS issues a final regulation. The interim lighting provision allows prororated deductions from 30 cents to 60 cents per square foot for lighting systems as described below.

These deductions are available for buildings or systems placed in service from January 1, 2006, through December 31, 2013.

Who is eligible for the incentives?

The person or organization that makes the expenditures for construction is generally the recipient of the allowed tax deductions. This is usually the building owner, but for some HVAC or lighting efficiency projects, it could be the tenant. For government-owned buildings, the deduction may be taken by the building or system designer. Click here for the complete IRS rules.

What are the incentives and how do they work?

The builder (or designer in the case of publicly-owned buildings) can take the deduction in the year the property was placed in service. The building or system must be certified, with inspection and testing, as meeting the energy cost savings goal according to guidance issued by the IRS in consultation with the Department of Energy (a link to this guidance is provided below).

Key provisions in the guidance include the following:

For lighting systems, until the IRS issues a final rule, the law specifies that a deduction of $0.30 per square foot can be taken if the lighting system employs dual switching (ability to switch roughly half the lights off and still have fairly uniform light distribution) and reduces installed lighting power by at least 25% from values specified in specific cited tables in ASHRAE Standard 90.1-2001. As lighting power reductions climb from 25% to 40%, the deduction is increased proportionally, up to $0.60 for a 40% power reduction (plus the dual switching). This prorated credit does not apply to warehouse lighting.

For more information on the commercial lighting tax incentive, see LightingTaxDeduction.org and AdvancedBuildings.net.

What do I have to do to qualify for the incentives?

Follow the guidance issued by IRS – a link is provided below. For a taxpayer, they will need to know the square footage of the building (the IRS guidance explains how to calculate this), when the building was placed in service, and have a certification from a qualified individual stating which targets have been met (50% savings for three systems or 16 2/3% savings for one system). There are no special forms to apply for this deduction, click here for details.

Click here to access IRS guidance on qualifying commercial property, or visit the IRS web site.

Where can I learn more about qualifying technologies and designs?

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