A Powerful Energy-Efficiency Tax Break for Commercial Property

By David Thaw, Executive Vice President, Gumbiner Savett Inc.

Significant tax savings are available to the owners and lessees (and some designers) of commercial property. This underused tax break, known as Section 179D, relates to the installation of certain energy-improvement systems.

What is Section 179D?

It’s a tax deduction that rewards the inclusion of certain energy-efficient systems in the construction or improvements of new and existing commercial buildings, as determined by a baseline that compares similar buildings in similar climates. The deductions are:

• $1.80, the maximum deduction per square foot, when energy reduction is certified to be at least 50 percent
• $0.60 per square foot for certified energy reduction of at least 25 percent (50 percent for warehouses)
• $0.30 per square foot for certified energy reduction of at least 16.3 percent

These reductions must be attributed to the heating, cooling, ventilation, hot water and interior lighting systems.

The energy reduction must be certified by a registered IRS-qualified engineer or contactor using Department of Energy-approved software and must meet the minimum requirements of the American Society of Heating, Refrigerating and Air-Conditioning Engineers standard 90.1-2001.

How can this benefit you?

Section 179D could result in a substantial tax deduction, depending on the size of your building and the systems you install. For example, a building of 60,000 square feet could deliver a maximum tax deduction of $108,000 (60,000 X $1.80).

What buildings qualify?

For each level of tax deduction, buildings must be located in the United States, and can be claimed for any size commercial building or any apartment building of at least four stories.

While the deduction is generally granted to the building owner or lessee, certain government-owned buildings may be eligible to have the tax benefit go to the designer.

What types of improvements are included?

Three areas of energy improvement may each qualify for one-third of the maximum deduction.

• Interior lighting systems
• Heating, cooling, ventilation and hot-water systems
• Upgrades to the building envelope (insulation materials or systems, exterior windows, skylights, doors, or metal or asphalt roofs)

What is the time frame for claiming this deduction?

Section 179D is available for qualifying improvements implemented before January 1, 2014. The deduction must be taken for the year the improvements were placed in service. But for those who take advantage of this deduction, the combined benefits of substantial tax savings, lower energy costs and good public relations offer the potential for a huge win.