When you upgrade your building for energy efficiency, you can save some cold, hard cash. A major incentive has been in place for several years for building owners who upgrade their systems – whether the building is new or used.
Businesses can take a tax deduction by reducing the energy costs associated with three energy efficient components of their building – interior lighting system; building envelope; and heating, cooling, ventilation and water heating equipment. Buildings must meet the ASHRAE 90.1-2001 standard and the system must be placed in service between January 1, 2006 and December 31, 2013 in order to be eligible. The deduction is available in two levels:
- Buildings that save 50 percent or more of projected annual energy costs across all three system components are eligible for a tax deduction of $1.80 per square foot.
- Buildings that save a percentage of projected annual energy costs for one of the three components -building envelope (10 percent energy savings), lighting (20 percent), and heating & cooling (20 percent) – are eligible for a partial deduction of $0.60 per square foot.
The overall per-building dollar limitation on the deduction is the cost of the project.
The organization that makes the expenditures is generally the recipient of the deduction, which can be taken in the year the system is placed in service. The building must be certified by a qualified individual (a licensed engineer or contractor) as meeting the energy cost savings goal.
The deduction is figured as defined above (square footage x $.60 or $1.80). The amount of the deduction reduces the depreciable basis. This means that any Sec. 179 that is taken on the property must be reduced by the amount of the deduction. The credit is also considered depreciation when the asset is sold. The deduction is allowed by Sec. 179D.
Be sure to consult with your financial advisor to ensure that you document the upgrades with the needed records. Your advisor can also assist you in applying the deduction on your corporate tax return.