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Energy Efficient Buildings Tax Deduction

The Energy Policy Act of 2005 (EPAct) included tax incentives and loan guarantees to promote clean energy production and energy efficiency.  One of these tax incentives was a special tax deduction under Section 179D of the Internal Revenue Code commonly referred to as the “Energy Efficient Commercial Buildings Tax Deduction” (or EPAct 179d). 

EPAct 179d allows building owners a one-time tax deduction of up to $1.80/sq. ft. following implementation of energy efficient measures. According to the act, this deduction is “available to owners of new or existing buildings who install (1) interior lighting; (2) building envelope, or (3) heating, cooling, ventilation, or hot water systems that reduce the building’s total energy and power cost by 50% or more in comparison to a building meeting minimum requirements set by ASHRAE Standard 90.1-2001.. as calculated using a qualified computer software approved by the IRS”.    

The IRS does allow partial deductions of $0.60/sq. ft. for each building subsystem meeting the following targets:

  • Interior Lighting System: 20% Savings (a prorated deduction of $0.30-0.60/sq. ft. is available for lighting systems not quite meeting the target)
  • Heating, Cooling, Ventilation, and Hot Water Systems: 20% Savings
  • Building Envelope: 10% Savings

In 2008, the IRS issued Notice 2008-40 allowing allocation of the tax deduction to the designer (architect, engineer or ESCO) for qualifying Federal, State or local government owned buildings.  This can be a huge benefit to designers of schools and other public buildings as many recently designed buildings likely already qualify. 

Example 80,000 sq. ft. Elementary School:

  • $24k - $48k Partial Lighting Deduction
  • $48k Partial HVAC Deduction
  • $48k Partial Envelope Deduction
  • $144k Potential Full Deduction

Typically deductions can be claimed up to 3 years back through an amended tax return.

Go to http://www.efficientbuildings.org/ for more up to date information about the provision.

The IRS requires an independent, qualified and properly licensed individual to certify that the subject building has met the required energy savings targets.  Our team of licensed Professional Engineers can create the necessary energy models and engineering reports required to certify your project.