Did you know that you may be eligible for a substantial tax deduction of up to $1.80 per square foot for improving the energy efficiency of your building or designing energy efficiency into your new building? If you're already thinking of a retrofit project, this can significantly improve your Return on Investment. If not, act quickly because this benefit is set to expire at the end of the year.
The Energy Policy Act of 2005 includes a tax deduction for investments in "energy-efficient commercial building property" designed to significantly reduce the heating, cooling, water heating, and interior lighting energy cost of new or existing commercial buildings. To be eligible, the energy-efficient commercial building property must be placed in service between January 1, 2006 and December 31, 2008. Warehouse and industrial facility owners can now reduce the payback period of investing in energy-efficient retrofit projects or new components with the added benefit of deducting up to the entire expense of these costs immediately instead of depreciating them over 39 years.
To qualify for the full $1.80/Sq. Ft. deduction, a building owner or tenant must reduce the total energy used by 50% or more. A partial deduction of $0.60 per square foot is available for investments that reduce energy consumption by 16 2/3% in either the lighting system, heating and cooling system or in the building envelope. These tax deductions reduce your overall taxable income with the value of the deduction dependent on your tax bracket.
How Can I Qualify For the Tax Deduction?
Before you can claim this deduction, you must obtain a certification from a qualified independent and licensed engineer stating that your retrofit project or new installation satisfies the requirements of 179D(c)(1) of the tax code. There are several alternative ways a building system may qualify:
1. The whole building may qualify for up to $1.80 per square foot for a 50% reduction in energy consumption.
Individual building systems can each qualify for up to a $0.60 per
square foot deduction for a 16 2/3% reduction in energy consumption.
These systems are:
- Lighting systems
- HVAC and water heating systems
- Building envelope
3. Lighting systems may receive a $0.30 to $0.60 deduction for reductions in lighting power density from ASHRAE 90.1-2001 tabular values of 25 percent to 40 percent respectively, with linear interpolation between 25 and 40 percent.