Allocations of sec. 179D deductions by government building owners.

• Author: Wamboldt, Lisa

In October 2009, President Obama issued an executive order setting sustainability goals for federal agencies in improving their environmental, energy, and economic performance. Agency targets include a 26% improvement in water efficiency by 2020 and 50% recycling and waste diversion by 2015, with 95% of all applicable contracts meeting sustainability requirements. This is an ambitious goal, given that the federal government occupies nearly 500,000 buildings and purchases more than $500 billion per year in goods and services.

Many of the improvements to government-owned and government-leased buildings will take the form of energy-efficient building improvements in lighting, heating, cooling, and insulation. In the context of a commercial building, such improvements likely would be eligible for Sec. 179D accelerated tax deductions. Notice 2008-40 provides that in the case of a government-owned building, the tax benefit of these deductions may be allocated by the government owner of the property to the designer or person who creates technical specifications for improvements that otherwise would be eligible for the Sec. 179D deduction.

Qualifying for the Sec. 179D Deduction

The Energy Policy Act of 2005, P.L. 109-58, enacted Sec. 179D, which is scheduled to expire after 2013. Sec. 179D allows a taxpayer to deduct fully in the current year the cost of energy-efficient commercial building property installed during the tax year, up to a cap. The deduction is available both for upgrading existing buildings and for building new structures, using new or used commercial property, if placed in service after 2005 and before 2014.

Energy-efficient commercial building property (qualified property) is property that is depreciable or amortizable, installed on or in any building located in the United States, and within the scope of standards established by the American Society of Heating, Refrigerating, and Air-Conditioning Engineers and the Illuminating Engineering Society of North America. The property must be related to interior lighting systems; heating, ventilation, and air conditioning systems; hot water systems; or the building envelope (e.g., insulation and windows).

The maximum deduction amount is $1.80 per square foot of building for qualified property that reduces by 50% or more annual energy costs compared with a reference building. A reference building is one that is located in the same climate zone as the taxpayer's building and that is...