Starting with 2023, there is a new deduction available for energy efficient commercial buildings. You may qualify for the Energy Efficient Commercial Buildings Deduction if you own a building and install energy-efficient property. Higher deductions could be available if your installations save more energy or meet certain standards. As a result, making your building more energy-efficient could help you save money on taxes.
This deduction is available for new buildings that produce energy efficiency of at least 25% or for improvements made to an existing building that improve the efficiency of it by at least 25%. For example, improvements to an office building that increase its efficiency.
Normally, the cost of a commercial building or the cost of a building improvement can not be claimed as an expense when actually made. Instead, when the building or the improvement is placed in service the cost has to be taken as an expense over 39 years starting with the year when the building/improvement is placed in service.
This new rule available starting with 2023, section 179D, allows to take a lot bigger expense in the first year when the building/improvement is placed in service, if the requirements of the deduction are met.
Are You Eligible?
Starting from January 1, 2023, the tax deduction is available to the following groups:
- owners of qualified commercial buildings,
- designers of energy-efficient commercial building property or energy-efficient building retrofit property that are installed in buildings owned by certain tax-exempt entities.
Previously, this deduction was only available to owners of qualified commercial buildings and designers of energy efficient commercial building property installed in buildings owned by certain government entities. So, this is a new expansion of the taxpayers that can claim the deduction.
Requirements
To summarize the requirements:
- The energy efficiency improvement has to be at least 25%
- The building has to meet the 90.1 ASHRAE Standard (this is something to talk to with the engineer or architect)
- The building has to be built with “qualified property”: qualified property includes depreciable property installed as part of interior lighting systems, heating, cooling, ventilation and hot water systems or the building envelope
- Also, you must obtain a certification from an engineer or contractor licensed in your state that will have to use the computer modeling required by the government to issue the certification
Amount of the Deduction
For properties in service starting with 2023, the tax deduction for energy-efficient property is based on the lesser of two amounts:
- the cost of the installed property,
- the savings per square foot, which is calculated as follows:
- $0.50 per square foot for a building with 25% energy savings,
- an additional $0.02 per square foot for each percentage point of energy savings above 25%,
- the maximum amount is $1.00 per square foot for a building with 50% energy savings.
Also a bigger amount of the deduction (5 times more) is available if the contractors/laborers are paid according to the Secretary of Labor guidance for the respective geographical area (the exacts rules can be found in this notice). This is not a requirement, is just that if you meet this criteria you get a much bigger deduction.
The amount of the deduction ranges from $0.50 times the square footage of the building, if the 25% efficiency is met, up to a maximum of $1.00 times square footage for a building with 50% energy savings. And if laborers are paid local prevailing wages and apprenticeship requirements are met, then the deduction is 5 times more.
Energy Efficient Commercial Building Property
- Energy Efficient Commercial Building Property:
- this must be installed in a building located in the U.S. and should be within the scope of a specified Reference Standard 90.1 of the:
- American Society of Heating, Refrigerating, and Air Conditioning Engineers, and
- Illuminating Engineering Society of North America,
- the property should be installed as part of the:
- interior lighting systems,
- heating,
- cooling,
- ventilation, and
- hot water systems, or
- the building envelope.
- it should be eligible for depreciation or amortization,
- the installation should be part of a plan to reduce annual energy and power costs by 25% or more compared to a reference building meeting the minimum requirements of Reference Standard 90.1.
- this must be installed in a building located in the U.S. and should be within the scope of a specified Reference Standard 90.1 of the:
Energy Efficient Building Retrofit Property
- Energy Efficient Building Retrofit Property:
- the property should be installed as part of the:
- interior lighting systems,
- heating,
- cooling,
- ventilation, and
- hot water systems, or
- the building envelope.
- a qualified building is one located in the U.S. and has been in service for at least 5 years before a retrofit plan is established,
- in addition, the property should be eligible for depreciation or amortization and must meet certain energy-saving requirements.
- the property should be installed as part of the:
In conclusion, if you meet some energy efficiency requirements you might qualify for the Energy Efficient Commercial Buildings Deduction. If you were to qualify for this deduction, it would mean that you can reduce your taxable income in the year you place the building in service by a lot more than with the regular depreciation over 39 years. This is something to keep in mind and maybe consult with your architect or engineer and your CPA.
In the meantime, if you encounter any issues or have any questions, we are here to help you with your accounting, QuickBooks, and tax needs. Click here to schedule an appointment.
This material is for informational purposes only. It does not constitute tax, legal or accounting advice.