Tax Incentives Encourage Owners
To Construct Green Buildings

By: David S. Riddle, P.E., Bricker & Eckler Construction Law Fellow

Reprinted from June 2006 ohioconstructionlaw.com

Highlights. Following up on last month’s article on energy-efficient (“green”) buildings, this article explains an additional reason commercial and public owners should consider building green: income tax incentives offered by the IRS in 2006 and 2007.

Why Go Green?

Whether at the gas pump or in the electric bill, everyday we confront reminders of increasing energy costs. For a building owner or lessee, increased utility costs impact the bottom line, decreasing money for other items—cash profits or better education for students. New construction and renovations give owners an opportunity to evaluate energy conservation strategies and consider their options.

“Green” building design can reduce operating costs by reducing overall utility costs. For more information on Green building design, see Green Buildings & Green Hospitals – Earning Points for Being Energy Efficient. But operating cost savings aren’t the only benefit of following green building principles—the federal government has added tax incentives of up to $1.80 per square foot to encourage commercial building owners and leaseholders to invest in energy conservation measures.

On August 8, 2005, President Bush signed H.R. 6, the Energy Policy Act, into law. Adding a new section to the IRS code, §179D, the Act allows taxpayers to deduct the cost of energy-efficient property installed in commercial and public buildings, and it puts a cap on the deduction. Before claiming the income tax deduction, the taxpayer must obtain a certification from a qualified individual that the required energy savings will be achieved.

What Qualifies for the Incentive?

The standard used to measure the certification is Standard 90.1-2001, Energy Standard for Buildings Except Low-Rise Residential Buildings. The American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) and the Illuminating Engineering Society of North America (IESNA) jointly developed this Standard for the American National Standards Institute. This standard has been adopted in many states, including Ohio, as a statewide referenced standard in the state building code that must be met for new construction and renovation.

To qualify, the building must be within the scope of Standard 90.1-2001. As the title might imply, the standard covers nearly every building except residential structures. The Act also requires the building systems to be certified as placed in service after December 31, 2005 and before January 1, 2008. This generally means the project must be completed between the referenced dates—a narrow window of opportunity, when you consider the timeline for the average construction project.

To qualify for the full $1.80 per square foot deduction, the interior lighting systems, heating, cooling, ventilation, and hot water systems, and building envelope incorporated into the building must reduce the total annual energy costs associated with those systems by 50% as compared to a “Reference Building.” Reductions in other energy use areas, such as elevators and plug loads (equipment such as computers “plugged” into electrical receptacles), do not count toward the 50% reduction.

At first glance, the 50% reduction appears to be an unreasonable expectation. Does this mean you must reduce your energy cost by 50% in order to qualify? No. The reduction is compared to a “Reference Building,” not the actual building. A “Reference Building” is a computer model of the owner’s building located in the same climate zone and is otherwise the same except that its interior lighting systems, heating, cooling, ventilation, and hot water systems, and building envelope meet the minimum requirements of Standard 90.1.

If you do not meet the 50% reduction, does that mean you will not be able to take any deduction? Again the answer is no. The Act allows for three “partial qualifications” by separating the building subsystems. Each subsystem (interior lighting system; heating, cooling, ventilation, and hot water system; and building envelope system) may qualify for a deduction if the subsystem will reduce the total annual energy costs associated with all the subsystems by 16 2/3 % as compared to a “Reference Building.” Each subsystem that meets this requirement will allow the building owner to take a deduction of $0.60 per square foot. Again, reductions in other energy use areas, such as elevators and plug loads, do not count toward the reduction.

Getting Certified

In order to claim any deduction, the owner or lessee must obtain a certification from a qualified individual. As discussed above, the project must meet the required reduction. As part of the certification, the qualified individual must perform field inspections to certify that the building has met or will meet the energy-saving targets contained in the design plans and specifications. The qualified individual must perform the inspections in accordance with any inspection and testing procedures prescribed by the National Renewable Energy Laboratory as Energy Savings Modeling and Inspection Guidelines for Commercial Building Federal Tax Deductions.

The qualified individual must include the following declaration in the certification:

Under penalties of perjury, I declare that I have examined this certification, including accompanying documents, and to the best of my knowledge and belief, the facts presented in support of this certification are true, correct, and complete.

In addition to the above statement, the certification must contain the name, address, and telephone number of the qualified individual, the address of the building, a statement that the building owner has received an explanation of the energy efficiency features of the building and of its projected annual energy costs. The certification must also identify the computer software used, certify that the software is a qualified software, and include a list identifying the components of the subsystems.

Application to Public Buildings

The Act also makes provisions for deductions for the installation of energy efficient equipment on or in public property. Since government entities pay no income tax, the Act provides that the deduction shall be allocated to the person primarily responsible for designing the property. The IRS has not yet released regulations detailing how this part of the Act will be implemented.

Odds & Ends

The taxpayer may claim the deduction for 2006 and 2007, but the total deduction for both years combined may not exceed $1.80 per square foot. Additionally, the basis of the building (the value used as the “cost” of the building to determine taxable profit upon the sale of the property) must be reduced by the total amount of the deduction.

While the deductions may not in themselves justify a project, when added to the lower operating costs, they may make economic sense for an owner or lessee. That evaluation is beyond the scope of this article, but being aware of the deductions gives you one more tool to help increase your bottom line, be it larger profits or better education.