Who is eligible for the incentives?
The person or organization that makes the expenditures for construction is generally the recipient of the allowed tax deductions. This is usually the building owner, but for some HVAC or lighting efficiency projects, it could be the tenant. For government-owned buildings, the deduction may be taken by the building or system designer. Click here for the complete IRS rules.
What are the incentives and how do they work?
The builder (or designer in the case of publicly-owned buildings) can take the deduction in the year the property was placed in service. The building or system must be certified, with inspection and testing, as meeting the energy cost savings goal according to guidance issued by the IRS in consultation with the Department of Energy (a link to this guidance is provided below).
Key provisions in the guidance include the following:
- Certifications must be done by "qualified individuals". Qualified individuals must be licensed engineers or contractors, not be "related" to the taxpayer taking the deduction (as defined by the IRS), and self-certify to the taxpayer that he or she has qualifications to provide the certification.
- Certifications for energy savings shall be in accordance with the procedures in Appendix G of ASHRAE Standard 90.1-2004, supplemented with several provisions in the 2005 California Title 24 Nonresidential Alternative Calculation (ACM) Approval Manual. Generally calculations will be done by computer software. Software must be on a list of products approved by the U.S. Department of Energy.
- The certification must include a field inspection of the building after the building is placed in service to confirm that the building has met the savings goals. Specific inspection and testing procedures have been developed by the National Renewable Energy Laboratory and can be downloaded by clicking here.
- Certifiers must also provide the building owner with an explanation and list of the energy efficiency features of the building and the projected annual energy costs.
For lighting systems, until the IRS issues a final rule, the law specifies that a deduction of $0.30 per square foot can be taken if the lighting system employs dual switching (ability to switch roughly half the lights off and still have fairly uniform light distribution) and reduces installed lighting power by at least 25% from values specified in specific cited tables in ASHRAE Standard 90.1-2001. As lighting power reductions climb from 25% to 40%, the deduction is increased proportionally, up to $0.60 for a 40% power reduction (plus the dual switching). This prorated credit does not apply to warehouse lighting.
For more information on the commercial lighting tax incentive, see LightingTaxDeduction.org and AdvancedBuildings.net
What do I have to do to qualify for the incentives?
Follow the guidance issued by IRS – a link is provided below. For a taxpayer, they will need to know the square footage of the building (the IRS guidance explains how to calculate this), when the building was placed in service, and have a certification from a qualified individual stating which targets have been met (50% savings for three systems or 10% for the building envelope, 20% for lighting, or 20% for the heating and cooling system). There are no special forms to apply for this deduction, click here for details.
Click here to access IRS guidance on qualifying commercial property, or visit the IRS web site
Where can I learn more about qualifying technologies and designs?
U.S. Department of Energy:
- EERE information on Commercial Building tax incentives
- NREL Energy Savings Modeling and Inspection Guidelines for Commercial Building Federal Tax Deductions (1.9 MB PDF)
- Qualified Software
- National Electrical Manufacturers Association Guidance on Certification Letters
For design advice concerning how to meet the whole building savings goals:
For information on qualifying lighting systems:
For additional information on the commercial building tax deductions:
