Energy-efficient commercial building deduction.

• Author: Schuerman, Michele

Beginning in 2006, there is a new deduction available for updating or constructing commercial building property to be more energy efficient. The Energy Tax Incentives Act of 2005 (ETIA), which took four years to pass, added new Sec. 179D. With so many commercial buildings exceeding 15 years in age, many business owners and landlords may be considering significant updates to enable more economical operation. Sec. 179D provides an immediate deduction for the cost of energy-efficient improvements to commercial property.

The maximum deduction allowed cannot exceed $1.80 per square foot of the building, less the aggregate of all prior-year deductions taken for the building under this provision. The property basis is then reduced by the deduction taken. Although this new deduction will primarily benefit real estate businesses, it will have some benefit to owners of commercial lease property.

Example: Corporation, B, operates a 10,000 square-foot manufacturing facility located in the U.S. In 2006, as part of a certified overall plan to reduce the total annual energy and power costs, it spends $50,000. Under new Sec. 179D, B can deduct $18,000 ($10,000 x $1.80) immediately on its 2006 return. It will then capitalize the $32,000 remainder and depreciate this over the asset's useful life. In 2007, B spent an additional $50,000 (which is also eligible for the Sec. 179D deduction). Because it already took the total deduction allowed under Sec. 179D in a prior tax year, B has to capitalize the entire amount spent in 2007.

Requirements

As with all new laws, there are specific requirements that must be satisfied to enable taxpayers to claim the new deduction. First, the building must be located in the U.S. and be within the scope of Standard 90.1-2001 as in effect on April 2, 2003. Standard 90.1-2001 is a publication of the American Society of Heating, Refrigerating, and Air Conditioning Engineers (www. ashrae.com) and the Illuminating Society of North America. It provides minimum requirements for the design of energy-efficient buildings. Further, it has general industry acceptance and its language is often used in new building codes.

Second, the property must be installed as part of (1) the interior lighting systems, (2) the heating, cooling, ventilation and hot water systems or (3) the building envelope. The term "building envelope" is not defined in Sec. 179D; however, under Sec. 25C(c)(2), the term is defined as including the wall and roof assemblies...