Alerts and Updates
IRS Releases Interim Guidelines for Section 179D Energy-Efficient Commercial Buildings Deduction
June 27, 2006
The IRS recently released interim guidelines pertaining to the deduction for energy-efficient commercial buildings under Section 179D of the Tax Code. This deduction was made available to building owners and leaseholders pursuant to the Energy Policy Act of 2005, enacted on August 8, 2005. The interim guidelines supplement Section 179D and are expected to be incorporated as regulations.
Specifically, the interim guidelines address the process by which a taxpayer obtains certification that installed energy-efficient property qualifies under Section 179D for the full deduction, and establish the total annual energy savings required for obtaining a partial deduction. The interim guidelines also provide information about the software programs that must be used in calculating power and energy expenditures.
Qualifying Energy-Efficient Commercial Building Property and Potential Deductions
Section 179D provides commercial building owners and leaseholders with a deduction for implementing energy-efficient commercial building property in their buildings between December 31, 2005, and January 1, 2008. The deduction is available whether the respective space is new construction or previously existed and applies in the year in which the energy-saving property was made ready for its intended use.
As defined in the Tax Code, "energy efficient commercial building property" is property: (a) with respect to which depreciation (or amortization) is allowable; (b) installed in a building located in the United States and within the scope of Standard 90.1-2001 of American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America; and (c) installed as part of the interior lighting systems, heating, cooling, ventilation and hot water systems, or as part of the building envelope. Further, the installed interior lighting, heating, cooling, ventilation, hot water systems and building envelope must either reduce the total annual energy and power costs by fifty percent (50%) or more, or be part of a taxpayer's overall plan, which includes the subsequent installation of the same, and which will reduce the total annual energy and power costs by fifty percent (50%) or more, as compared with a "Reference Building," which is compliant with the minimum requirements of Standard 90.1-2001. For taxpayers meeting this threshold, the maximum deduction available to them is $1.80 per square foot, less the aggregate amount of the Section 179D deductions allowed with respect to the building for all prior taxable years.
Section 179D also provides for a partially qualifying commercial property deduction, which applies to property that would otherwise qualify as energy-efficient commercial building property but results in reductions in the total annual energy and power costs of less than fifty percent (50%) but greater than or equal to sixteen and two-thirds percent (16.66%). For taxpayers meeting this threshold, the maximum deduction available to them is $0.60 per square foot, less the aggregate amount of the Section 179D deductions allowed with respect to the building for all prior taxable years. Section 179D also provides interim guidelines encouraging and providing a deduction for improvements made to lighting systems.
Certification of Qualified Property
Section 179D requires that, before a taxpayer may claim a deduction, the property must be certified as energy-efficient commercial building property by a qualified individual. The requirements of a qualified individual include that the person may not be related to the taxpayer and must be an engineer or contractor that is properly licensed in the jurisdiction where the building is located. The certification does not need to be attached to the taxpayer's tax return, but taxpayers are required to maintain books and records that would satisfy investigation into the applicability of the deduction.
Approved Software Programs
Section 179D requires that certain software programs be used to identify energy expenditures for the purposes of the deduction. The Department of Energy is establishing a public list of software, which may be viewed at http://www.eere.energy.gov/buildings/info/tax_credit_2006.html.
For Further Information
If you have any questions about this Alert or would like more information, please contact one of the attorneys in our Real Estate Practice Group or the attorney in the firm with whom you are regularly in contact.
As required by United States Treasury Regulations, you should be aware that this communication is not intended by the sender to be used, and it cannot be used, for the purpose of avoiding penalties under United States federal tax laws.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.
