The IRS has issued Notice 2006-52, which provides interim guidance for taking the energy efficient commercial buildings deduction (Internal Revenue Code Section 179D).
Requirements to Claim the Deduction
The energy efficient commercial buildings deduction is available for taxpayers who place qualifying property in service in an owned or leased commercial building after December 31, 2005, and before January 1, 2009.
The property must be:
- Installed in any building located in the U.S. and within the scope of The American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) Standard 90.1-2001.
- Installed as part of the interior lighting systems, the heating, cooling, ventilation and hot water systems or the building envelope.
- Certified that installation of such property will reduce total annual energy and power costs by 50 percent or more as compared to a reference building that meets the minimum requirements of ASHRAE Standard 90.1-2001. The required 50 percent reduction must be accomplished solely through energy and power cost reductions for the heating, cooling, ventilation, hot water and interior lighting systems.
The maximum deduction cannot exceed $1.80 times the square footage of the building, less the aggregate of any prior year deductions taken for the building under Section 179D. If multiple taxpayers install energy efficient commercial building property in the same building, the maximum deduction by all taxpayers cannot exceed the above amount. The square footage of the building includes all conditioned areas with headroom height of 7.5 feet or greater. To compute the percentage reduction in the total annual energy and power costs:
- Use the performance rating method (PRM). Under the PRM, a reference building is used as a standard to compare to the taxpayer’s building. The reference building must be located in the same climate zone as the taxpayer’s building and otherwise comparable to the taxpayer’s building except that the interior lighting, heating, cooling, ventilation and hot water systems, and building envelope must meet the minimum requirements of ASHRAE Standard 90.1-2001.
- Determine the percentage reduction in energy and power costs by subtracting the proposed building annual energy and power costs from the reference building annual energy and power costs.
- Divide the difference by the reference building annual energy and power costs to determine the percentage reduction.
Stated Another Way…
For example, if the annual costs associated with the reference building are $700, and the annual costs associated with the proposed building are $300, there is a 57 percent reduction in energy costs [($700 – $300) / $700].
Section 179D requires the taxpayer to receive certification from a qualified individual to ensure compliance of the building with energy savings plans and targets. Section 5.05 of Notice 2006-52 states the qualified individual must meet the following requirements:
- Can’t be related to the taxpayer within the meaning of Section 45(e)(4).
- Must be an engineer or contractor who is properly licensed as a professional engineer or contractor in the jurisdiction in which the building is located.
- Present in writing to the taxpayer that he or she has the requisite qualifications to provide the certification required under Section 4 of the notice or to perform the inspection and testing described in Section 4.05 of the notice.
Section 4 of Notice 2006-52 details the items that must be included in the certification to satisfy the requirements of Section 179D(c)(1). A taxpayer isn’t required to attach the certification to the return on which the deduction is taken. However, he or she must maintain sufficient books and records to establish the entitlement to and amount of any deduction claimed.
A partial deduction may be taken if one of the systems allowed under Sec. 179D(c)(1)(C) (i.e., the interior lighting systems, the heating, cooling, ventilation, hot water systems or the building envelope) and subject to certification will reduce the total annual energy and power costs by 16 2/3 percent or more as compared to ASHRAE Standard 90.1-2001. The maximum partial deduction available is $0.60 per square foot of the building. IBI