Building owners who completed energy-efficiency facility upgrades in 2014 received good news last December when the president signed the Tax Increase Prevention Act of 2014. The legislation extended the deductions of Section 179D of the Energy Policy Act (EPAct) of 2005 to include projects that became available for use in 2014.
Private building owners who meet the criteria of EPAct Section 179D may receive a tax deduction of up to $1.80 per square foot of newly constructed or renovated space. Publicly owned buildings also can benefit by transferring the deductions to the “designer” when negotiating contract terms. The one-year extension applies to commercial or high-rise residential buildings where the project was completed in 2014.
Section 179D is broken into three deductions depending on a project’s scope and the efficiency goals met. Up to 60 cents per square foot can be deducted for each of these categories: upgrades to HVAC and water heating systems, improvements to the building envelope and interior lighting upgrades that reduce lighting power density (LPD) by at least 25 percent to 40 percent of the ASHRAE 90.1-2001 level. The deduction for lighting projects is on a graduated scale, starting at 30 cents per square foot based on the LPD reduction achieved. Lighting in warehouse facilities must achieve at least a 50 percent LPD reduction in order to qualify. All deductions are limited to the lesser of the amount of each deduction, or actual project cost.
While these deductions have been around since 2005, they have not been used on the majority of projects. In order to claim the deduction, an independent third party must be engaged to provide a building energy model and certify the energy savings. This eliminates the benefit of the deduction on smaller buildings, because the cost of certification can approach or exceed the value of the deduction. Additionally, because the deduction is just that — a reduction in income and not a tax credit — the actual benefit is dependent on the claiming entity’s corporate tax rate on income produced, making the value of the deduction around 40 percent or less of the square-foot values.
While the future of these deductions remains uncertain, owners with qualifying projects should take advantage of them while they can. For additional information, contact Tim Schroeder at firstname.lastname@example.org or Bob Knoedler at email@example.com.