New IRS Guidance on Tax Breaks for Efficiency in Commercial Buildings

New IRS Guidance on Tax Breaks for Efficiency in Commercial Buildings

The Internal Revenue Service has posted new guidance on how commercial building owners or leaseholders can qualify for the tax deduction for making their building energy efficient. The notice establishes a process to certify the required energy savings in order to claim the deduction.

The commercial building deduction, which was enacted in the Energy Policy Act of 2005, allows taxpayers to deduct the cost of energy-efficient property installed in commercial buildings. The commercial building deduction provides a tax deduction of $1.80 per square foot of floor area for commercial buildings that use no more than half the energy of a building constructed according to current model building codes. A deduction of $0.60 per square foot is allowed for reducing lighting energy use; heating, cooling, and envelope energy use; or building envelope heating and cooling loads by amounts consistent with the overall 50% savings target. The IRS guidance clarifies procedures for demonstrating that the 50% savings target has been achieved, including procedures for obtaining required certifications from qualified experts.

The amount deductible may be as much as $1.80 per square foot of building floor area for buildings that achieve a 50% energy savings target. The notice provides that buildings below the 50% threshold may, nevertheless, qualify for a deduction of up to 60 cents per square foot of building floor area if they meet a 16% energy savings target.

Before claiming the deduction, the taxpayer must obtain a certification that the required energy savings will be achieved. The new guidance prescribes the content of that certification and the qualifications that must be met by the person providing the certification.

The Department of Energy has also announced it will create and maintain a public list of software that must be used to calculate energy savings for purposes of providing the certification. It also provides a process that software developers must use if they desire to have their software included on that list.

The IRS guidance is available for download online (PDF).