IRS Issues Procedures for Tax Reductions on Energy-Efficient Buildings
On June 2, the Internal Revenue Service (IRS) issued Notice 2006-52, which provides information on how commercial building owners or leaseholders can qualify for tax deductions by making their buildings more energy efficient. The commercial building deduction was enacted in the Energy Policy Act of 2005 and allows taxpayers to deduct the cost of energy-efficient property installed as part of a commercial building (the provision was codified in IRS Section 179D. This section relates to commercial buildings placed into service after December 31, 2005 and before January 1, 2008).
Under this provision, the deductible may be as much as $1.80 per square-foot of building floor area for buildings that achieve a 50-percent energy savings target. Buildings below the 50-percent threshold may also qualify for a deduction of up to 60 cents per square-foot of building floor area if they meet a 16 2/3-percent energy savings target.
On publicly-owned projects, there is a provision that allows the credit to pass through to the “person primarily responsible for designing the building.” This means that the architect or design-builder could take advantage of the deduction in these instances.
According to Notice 2006-52, if the three energy-using systems noted (interior lighting, HVAC and the water heating system and the building envelope) reduce annual energy power costs by more than 50 percent than a reference building, the taxpayer may receive a one-time deduction of up to $1.80 per square-foot of the building. The notice also requires that a 50-percent reduction be accomplished completely through energy and power cost reductions from the HVAC, hot water and interior lighting systems. Buildings not meeting the 50-percent reduction may qualify for a partial deduction (up to 60 cents per square-foot) if one of the three energy-using systems meets given requirements.
Specifically speaking, the building envelope will be eligible for a deduction if it will reduce annual energy and power costs, with respect to the three energy-using systems, by at least 16 2/3 percent as compared to a reference building. The total deduction will be calculated by taking the product of the 60 cents and the square footage of the building over the aggregate amount of the Section 179D deduction that is allowed for the building envelope for all prior taxable years, according to the notice.
In order to qualify for the deduction, taxpayers must obtain certification that the energy-using systems meet the given requirements. They are not required to attach the certification to their tax return, but are required to maintain records to establish entitlement for the deduction, according to the notice.
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