Tax Deduction

Section 179D provisions envision a tax credit of up to 1.8 dollars per square foot of commercial building construction. The total amount can be obtained if three kinds of energy efficiency projects are executed – lighting, HVAC and building envelope.

If you decide to opt solely for the installation of energy efficient LED lighting, you will qualify for a partial deduction under EPAct 179D. This partial deduction can reach up to 0.6 dollars per square foot of commercial building area.

To take advantage of the deduction, the constructor, designer or investor must opt for third-party certification. The certification company has to establish that the lighting improvement has resulted in significant energy consumption reduction, as compared to a similar commercial building.

Why Opt for LED Lights?

The use of LED lights for EPAct 179D incentive qualification has been gaining more and more popularity. Apart from making it easy to benefit from the incentive, the selection of such lighting systems will make the commercial spaces more attractive because of the energy efficiency results these deliver.

LED lights are more expensive than other energy efficient options on the market but they also happen to be tremendously durable and they tend to last longer than fluorescent lights. The LED lights feature cool operation and they are mercury-free.

This kind of lighting comes with zero UV emission. The LED bulbs produce only a small amount of infrared light. Since there’s no UV light, the LED bulbs can be used in places where UV-sensitive objects are found. Such places could include museums, art galleries or archaeological sites.

The use of LED lighting enables significant design flexibility. Individual LED lights can be used at points of interest and a number of lights clustered together will provide the perfect work area illumination. The color and distribution of light are also easy to control, which enables flexibility and the creation of the perfect workplace conditions in a commercial space.

LED lighting comes with a vast range of additional advantages that include:

• More light efficiency and since light is highly focused
• Very silent, especially when compared to the noisy fluorescent light bulbs
• A vast range of colors, which makes LED lights suitable for all purposes
• Instant lighting (again, in comparison to fluorescent bulbs)
• Low voltage power will be sufficient to light the LEDs
• Not affected by low temperature, which makes them suitable for outdoor use, as well

Where LED Lights can be Used in a Commercial Building

To benefit from the EPAct 179D incentive, it’s imperative to come up with a good plan for the creation of an energy efficient lighting system.

LED lights are perfect for use in commercial building garages where they can reduce the electricity consumption significantly. The 24-hour operation of many commercial garages leads to significant electricity costs associated to lighting.

The same applies to retail spaces, hallways and reception areas. Restaurants and dining areas will also benefit from the selection of the LED lighting possibility.

Constructors and designers of commercial spaces should think about efficiency, practicality and EPAct 179D qualification when coming up with architectural and construction plans. LED lights are a great possibility for making commercial spaces more attractive and reducing their energy consumption significantly.

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How much can businesses save by adhering to the section 179D requirements? Is the execution of such energy efficiency improvements a good idea and what deduction will these contribute to?

Section 179D Incentive: The Basics

The taxation incentive available under section 179D was extended retroactively in the end of 2014. This means all projects executed during the year and corresponding to the energy efficiency requirements can qualify for the taxation stimulus.

The deduction reaches up to 1.8 dollars per square foot of the commercial building’s surface area. Alternatively, a partial deduction will be available. The partial deduction is 0.6 dollars per square foot for any of the following improvements:

• Building envelope energy efficiency
• Lighting energy efficiency
• HVAC equipment energy efficiency

What does this mean? If an investor executes a project that focuses on building envelope and HVAC energy efficiency, the section 179D incentive will reach up to 1.2 dollar per square foot of the commercial building’s surface area.

A number of different construction projects can be executed. A commercial building is a vague term that could refer to an office, a warehouse, an industrial venue, a shop, a production facility or even a dormitory. A residential building that is redesigned to become a commercial one will also qualify for the incentive.

How Much Money can Businesses Save?

The section 179D tax deduction could reach a significant amount, depending on the complexity of the project and the number of buildings being constructed or retrofitted.

Here’s a simple example that will put things in perspective. An investor decides to build a 50,000 square feet commercial building. The tax deduction for each of the three components (lighting, HVAC and building envelope) will be up to 30,000 dollars (50,000 sq. feet x 0.6 dollars per square foot). If the project features all three kinds of improvements, the total amount of the deduction will be 90,000 dollars.

The construction of a bigger commercial project will obviously result in more significant tax deductions. If the surface area of the project is 750,000 square feet, the individual deduction for each of the three components is going to reach up to 450,000 dollars. Together, the three components add up to a total deduction of 1.35 million dollars.

Having an idea about the construction cost in advance is a good possibility for figuring out whether the section 179D tax deduction will contribute significantly to reducing expenses and simplifying project execution.

You should also keep in mind that buildings have to be certified by a third party to qualify for a taxation incentive. Though this evaluation has a particular cost, the investment in getting the certification will still make a lot of financial sense in the long run.

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Through the use of the tax deduction, investors may fully depreciate the cost of purchasing energy efficient lighting. Having a good idea about the terms and the conditions will be the key to picking the best option on the market and making the most under the EPAct 179D incentive.

General Requirements

To qualify for the incentive, a commercial building should consume 50 percent less electricity for HVAC purposes than a comparable property in the same region. If the design doesn’t meet the 50 percent requirement, it could still qualify for a partial deduction.

The execution of a lighting project is one of the simplest and most efficient possibilities for getting a partial deduction. In this case, the incentive will total 0.6 dollars per square foot, rather than the entire amount of 1.8 dollars per square foot.

For partial improvements, the lighting must produce 25 percent reduction in energy consumption. Under EPAct 179D, 15 percent of the reduction should stem from HVAC improvements and another 10 percent need to come from building envelope modifications.

Alternative Evaluation Methods for Lighting Improvement

Architects and engineers can use interim lighting rules and alternative methods of evaluation, in case solely lighting improvements have been carried out under EPAct 179D.

It’s possible to do a watts per sq. ft. calculation in an attempt to measure the energy efficiency of the lighting installation. The lighting will need to be anywhere between 25 and 40 percent more energy efficient than standard possibilities for commercial buildings.

If the lighting corresponds to the alternative method of evaluation criteria, the EPAct 179D tax deduction will be in the range from 0.3 to 0.6 dollars per square foot. Under this possibility, the lighting system should come with an automatic shut off feature and a bi-level switching component.

Types of Energy Efficient Lighting

LED lights and induction lighting are both great possibilities for getting a taxation incentive connected to commercial building energy efficiency.

The electricity savings that LED lights are capable of producing can be nearly 75 percent lower than the energy consumption of standard bulbs. The use of such lights is one of the easiest possibilities for getting an incentive totaling 0.6 dollars per square foot of property.

Induction lights are also preferred by many contractors because of the relatively low maintenance costs and the excellent energy efficiency these provide. Apart from qualifying the property for the EPAct 179D tax incentive, induction lights will also bring a very high return on investment in the long run for the owner of the property. This characteristic will make commercial units much easier to sell and it will also bring the value up.

A Few Additional Terms and Conditions

The building has to be certified by a third party prior to claiming the 179D incentive. The qualified assessment professional will compare the unit to a similar one and figure out the electricity savings that it produces.

The effective timeframe of the provision is from January 1, 2006 to December 31, 2014. EPAct 179D was extended retroactively in the end of 2014 to cover all of the projects executed through the year. Architects, engineers and contractors alike can claim the incentive provided under Section 179D.

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In the end of December 2014, the incentive was extended retroactively to cover all projects executed during the year. This means that investors still have possibilities to claim the deduction for projects executed in 2014 and corresponding to all requirements. 

How EPAct 179D Works

The deduction can reach up to 1.80 dollars per square foot of the commercial building’s area for all improvements. Alternatively, the deduction is 0.6 dollars per square foot for lighting improvements, building envelope or HVAC improvements, respectively.

The 179D tax deduction provides a lot of flexibility since the definition of a commercial building is rather broad. It includes offices, industrial buildings, warehouses, production facilities, multi-family residential buildings, dormitories or buildings that were constructed for other purposes but were later on redesigned.

The lighting, HVAC and building envelope improvements can be executed in a number of ways. The architect and engineer have a lot of freedom when it comes to guaranteeing the energy efficiency of the building. The end result should be a commercial building that produces 50 percent bigger electricity consumption savings than a comparable unit.

Over the past years, the energy efficiency requirements for new commercial constructions were seriously tightened. This is one of the main reasons why many new projects will qualify automatically for the 179D tax deduction.

Wondering whether your project qualifies for the initiative? An independent third party will evaluate its energy consumption and help you figure out whether the building can be certified under EPAct 179D.

Lighting, HVAC and Envelope Improvement Guidelines

These are the three categories of improvements that will result in certification for the 179D tax deduction.

The use of modern light opportunities like LED, induction and fluorescent lights is one of the preferred possibilities. The commercial building should also be built to enable maximum usage of natural light.

The upfront investment cost in modern lighting solutions is still high but the energy savings these produce and the manner in which they affect the value of the residential building justify the expenditure.

When it comes to HVAC and building envelope improvements, architects and engineers have an even bigger number of possibilities to choose among. Everything from the selection of quality materials to cleverly designed roofs will impact the energy efficiency of the building.

The 179D tax deduction could become available through the execution of projects like geothermal heat pump installations, the use of energy-efficient windows and doors, insulation, central air conditioning, the use of roofing materials that reflect rather than absorb solar heat and the installation of solar photovoltaic systems.

Any entity that executed such commercial construction projects throughout 2014 is entitled to a 179D tax deduction. Getting the building certified and proving its energy efficiency is the first step towards obtaining the incentive.

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The Importance of Energy Efficient Building Envelope

Outdated building envelope solutions lead to significant heat loss, which decreases the energy efficiency of the building.

Residential and commercial buildings add up to almost 40 percent of the US energy consumption. Most of the energy is dedicated to heating and cooling. The loss of heat results in additional energy use, higher utility bills and an increased carbon footprint.

The building envelope acts as a barrier between the inside of the building and the external environment. Many innovative solutions (like the use of modern insulation materials) boost the energy efficiency of the envelope and give access to financial stimuli like an energy efficient home credit.

Benefits of Building Envelope Improvements

Building envelope improvements increase the attractiveness of both residential buildings and office/commercial spaces. There are several main reasons why investors are increasingly demonstrating interest in higher building envelope energy efficiency.

Poor building envelope design could contribute to anywhere between 30 and 50 percent of the electricity bill due to the loss of heat. A “leaky” building is very expensive to maintain and the comfort level is low.

Contemporary building envelope solutions improve air quality and facilitate moisture management. Modern construction projects usually feature efficient ventilation systems alongside the building envelope improvements. These two factors contribute to the already mentioned benefits.

Improving Energy Efficiency

It’s relatively easy to improve energy efficiency through the selection of the right building envelope design. Responsible architects and engineers know how to correct air leakage problems in existing buildings and how to boost the energy efficiency of new constructions.

Building envelope modifications and projects that give access to an energy efficient home credit could be any of the following:

• The use of passive solar heating
• The selection of the right building envelope materials
• The strategic addition of insulation to the building envelope
• The selection of the right roof design and materials
• The strategic placement of doors and windows to minimize heat loss.

The Cost of Building Envelope Improvements

Calculating the building envelope design and execution costs in advance will help you figure out whether the project is going to bring the expected return on investment.

Keeping the amount of money that’s going to be saved through such projects in mind will be great for budget planning. The installation of an Energy Star window, for example, can save anywhere between 125 and 465 dollars per year on electricity for heating and cooling.

The addition of insulation to a residential building will decrease utility bills by nearly 12 percent, the Center for Climate and Energy Solutions reports.

Don’t forget that building envelope projects will also give you access to an energy efficient home credit. This financial stimulus decreases the cost of execution further and boosts the attractiveness of investment in energy efficient solutions.

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Tax incentives are available for several kinds of constructions like residential dwellings, offices, warehouses, industrial constructions and even dormitory buildings. All of them, however, have to correspond to several requirements. A building should be independently certified before it qualifies for a green building tax deduction.

Residential Green Buildings

A residential building that is constructed with energy efficiency in mind or an old building that has been retrofitted can qualify for a green building tax deduction.

Residential buildings can meet the energy efficiency requirements through improvements in the envelope (insulation), energy efficient heating and cooling equipment, as well as through adherence to the International Energy Conservation Code construction standards.

All of these improvements should make the residential building 50% more energy efficient than a residential building located in the same climate and having a comparable size. This is when a building can be considered green. The certification process involves independent third parties. They perform an audit and if the energy efficiency of the residential building is sufficient, it would become certified.

All green residential buildings that meet these requirements will qualify for an incentive totaling 2000 dollars per unit. The incentive will come in the form of a tax credit.

Commercial Green Buildings

The requirements for commercial green buildings are similar to the ones for residential units. These constructions will once again have to accomplish an energy efficiency level that surpasses the one of a comparable building.

In order to be considered green, commercial buildings will need energy efficient envelopes, lighting that conserves energy and HVAC systems that have a particular level of energy saving. All three of these elements need to be present for the building to be considered green and qualifying for a green building tax deduction.

There are different kinds of projects that can be executed to turn a standard commercial building into a green one. Isolation, efficient air conditioning systems, energy efficient light bulb usage and even natural ventilation can be used to boost the energy efficiency of the building.

Once again, a commercial building will need to have energy savings of 50 percent in comparison to a similar unit. Independent certification will be needed for the particular building to be considered a green one.

The benefits of energy efficient improvements are obvious. Such buildings can save a lot of money that will otherwise be used on heating, cooling and light. The green building tax deduction is just one stimulus for the execution of such projects. Currently, tax incentives are available for commercial and residential projects executed until the end of 2014. The serious industry lobby and the growing importance of energy conservation will probably contribute to the further extension or the provision of new incentives in the years to come.

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According to 2013 statistics by the Center for Sustainable Systems at the University of Michigan, commercial buildings contributed to 18 percent of the US electricity consumption. At that time, there were more than 5.64 million commercial buildings in the country – an increase of 46 percent in comparison to figures for 1979.

These are just some of the reasons why so many investors are beginning to explore commercial building green retrofitting. Here are several other reasons why such projects are becoming increasingly lucrative.

Available Financial Tools

Though a green building tax deduction used to be available in the years until 2013, its future is still uncertain. Regardless of the fact, entities interested in commercial building retrofitting can still benefit from financial tools and incentives.

Many entrepreneurs and lenders have provided financing options for the execution of such projects. Energy efficiency retrofitting increases the value of the commercial building and decreases certain kinds of expenditure. As a result, such improvements contribute to even better financial results in the future.

Tenants are Looking for Energy Efficiency

Entities that lease commercial building spaces are looking for sustainability improvements. This is why the demand will drive green retrofits mainstream and make many investors opt for the execution of such projects.

Many companies already understand the importance of adopting energy efficient, green corporate practices. The features of the commercial space that the company occupies will play a key role in the establishment of this green business reputation. The fact that businesses are consciously looking for energy efficiency features will affect the niche tremendously in the years to come.

Global Acceleration

Green retrofitting of commercial spaces is not taking place just in the US. The trend has gained international momentum and the commercial sector appears to be the most promising one.

According to a 2012 McGraw-Hill Construction study, the global construction market has started to shift. Green building is no longer being seen as a tiny niche, it has become a legitimate business opportunity. Many construction companies from all parts of the world reported that client demand and market demand have become the two driving forces for commercial building retrofitting.

The report suggests that nearly 50 percent of the construction companies questioned have plans to execute green renovation work by 2015. The United Kingdom is one of the countries where green retrofitting is most popular – nearly 65 percent of the companies planned the execution of such a project by 2015.

Rapidly increasing popularity and numerous new developments in the niche could accelerate the adoption of a new green building tax deduction or the extension of the previous incentive. Only time will tell what kind of stimuli are investors going to enjoy in the future. The numerous benefits that green retrofitting projects bring already, however, have led to rapid construction market transformation and dozens of new developments in the sector.

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How does the Residential Energy Efficient Property Credit Work?

An energy efficient home credit will be provided for improvements completed during the past year. The term of the program is until December 31, 2016.

The residential energy efficient property credit will cover 30 percent of the cost of qualifying energy equipment. This equipment could have been installed on a property that you currently live in or on a vacation home. The same rule applies to new residential projects.

The amount of credit is unlimited for most kinds of residential property. Credit that exceeds the sum owed in taxes can be transferred to the coming year. It’s yet to be seen whether the rule will remain valid after the end of 2016.

Qualifying Projects

You can execute several different residential property improvements in order to qualify for an energy efficient home credit.

The project varieties that you can consider executing include:

• Geothermal heat pumps
• Solar water heating systems or solar electricity production
• Small wind turbine systems
• Fuel cell systems

Only fuel cells need to be installed in the primary residence to qualify for an energy efficient home credit. All other projects can be executed on the primary residence, a vacation property or a second home.

More information about the requirements for each product and the qualification criteria is available at the Energy Star Website.

Alternatives

In the past, homeowners had an alternative option in terms of claiming an energy efficient home credit. The option was called the Nonbusiness Energy Property Credit but it expired in the end of 2013.

This program applies to all home improvements executed in 2013 and the prior years. It provided tax credit of up to 10 percent of the price of all qualifying products. This type of credit came with a 500-dollar limit for all kinds of energy efficient home improvements.

In order to qualify for this expired opportunity, you must have purchased and installed energy efficient equipment on your residential property in 2013 or the years before. The program applied solely to existing homes rather than new constructions.

This program included home improvements like:

• Biomass stoves
• Central air conditioning systems
• Gas, propane or oil hot water boilers and furnaces
• Energy-efficient door and window installation
• Energy-efficient skylights
• Insulation
• Energy-efficient roofing installation

Going for energy efficient home improvements will deliver a quick return on investment because of the saving on utility bills you’re going to achieve and the available financial stimuli. Though several programs have already expired, you still have possibilities for tax reduction through residential property improvements. Think about the most practical energy efficient project before getting started and do your calculations in advance. Preliminary research will enable you to save a lot of money in the long run and it will also lead to lucrative tax reductions.

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US Federal Programs

Such programs are mainly targeting residential property owners and there’s no information about expiration in the near future.

The US Federal Government provides a green building tax deduction for the execution of solar water heating, photovoltaic installations and solar space heating installations. The amount is 100 percent of the subsidy.

More information about US federal programs and the qualification criteria can be found at the Database of State Incentives for Renewables and Efficiency (DSIRE) website.

Federal Residential Renewable Energy Tax Credit

The federal residential green building tax deduction is available for the execution of projects involving solar water heating systems, wind energy generation, fuel cell systems, the use of geothermal heat pumps, fuel cells using renewable fuels and the use of other solar electric technologies.

This federal residential renewable energy tax credit is going to be available for projects, home improvements and construction initiatives executed until December 31, 2016.

The personal income tax credit totals 30 percent of the installation’s cost. There’s no upper limit. If there’s excess credit as a result of the incentive, the amount can be carried over to the coming year. There still is no information if the unused tax credit will be carried forward after the end of the program.

In order to qualify for the green building tax deduction, an investor must execute the project on a building that he or she currently occupies. The incentive is also available for projects involving vacation homes. Energy efficiency projects that involve rental property do not qualify for the federal tax incentive.

The types of expenditure covered by the tax incentive include on-site preparation labor cost, piping, wiring and system assembly.

More information about the federal residential renewable energy tax incentive is available at the DSIRE website.

Federal Mortgages for Green Building Projects

One final option is available for homeowners and investors interested in the execution of energy efficiency projects. The federal mortgages are available for passive solar space heating systems, solar water heating installations, photovoltaic systems and day lighting.

The energy efficiency mortgage can be taken to finance the execution of such projects or to purchase a new energy efficient home.

These loans are provided with the support of the US Federal Government and they are insured through Federal Housing Authority or Veteran Affairs. As a result, even individuals that cannot qualify for a traditional loan will be eligible for funding.

The amount of the energy efficiency mortgage can add up to 100 percent of the project’s cost. The mortgage limits will vary by county and state. There are some restrictions – the mortgage for such projects has to be the lesser of five percent of the property’s value or 115 percent of the median price of a single-family dwelling in the area. More information about the terms and conditions is available at the US Department of Housing and Urban Development website.

Homeowners and investors should also keep in mind that there could be state or local initiatives for the execution of energy efficiency projects. Going through the possibilities, comparing the terms and conditions and doing calculations in advance will help for the selection of the most attractive financial stimulus for green project execution.

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Photo Credit: iStock Photo

The latest developments concerning the extension of EPAct 179D came in the spring months of 2014 but many interest groups and companies dealing with energy efficient projects have started lobbying for prolonged financial incentives.

The energy efficient commercial building tax deduction, which is known as section 179D, expired on December 31, 2013. In April 2014, the Senate Finance Committee voted to approve a two-year extension under the Expiring Provisions Improvement Reform and Efficiency act or EXPIRE. When it comes to Senate approval, however, there has been no progress made.

EXPIRE Development

The act is currently being examined by US Senate. The Senate failed to pass the act in May since all republicans voted against the development.

Section 179D was originally introduced in 2005. Deduction incentives of up to 1.8 dollars per square foot of affected space were available for all qualifying commercial building energy efficiency improvements. Some of these improvements included lighting systems, HVAC and building envelope.

The provision was extended once already in 2008 but currently, EXPIRE is at a standstill and there’s no information whether the planned two-year extension is going to come into effect.

Lobbying for the Extension

Numerous renewable energy groups have lobbied vigorously for EPAct 179D to be extended by Senate. The American Wind Energy Association has been quite vocal in its support of EXPIRE.

According to energy efficiency and alternative energy organization, numerous workplaces are jeopardized by the Senate’s failure to extend the tax deduction.

The Geothermal Exchange Organization (GEO) has been another avid supported of EPAct 179Ds extension. According to GEO representatives, businesses will now have to deal with expenses of up to 500,000 dollars for geothermal installations. Section 179D previously reduced the cost of such installations by as much as 50 percent.

The Industry Remains Optimistic

Numerous industry representatives remain optimistic that Senate is going to make the decision about the extension of the tax provision.

The robust backing of the business sector and the intensified efforts of lobbying groups are sooner or later expected to impact decision makers and produce some extension, even if the provisions of EPAct 179D happen to be modified.

Other Energy Incentives

Commercial building project executors can still look for other incentives and financial stimuli for the execution of energy efficiency projects. While the fate of EPAct 179D remains unknown, various other projects and programs can be relied on.

Both state and local programs are available for entrepreneurs interested in green developments. Businesses making energy efficiency improvements are entitled to grants and governmental incentives. The Environmental Protection Agency’s (EPA) website has an extensive list of funding opportunities and the application requirements for each.

Officials and decision makers are putting more and more emphasis on green developments and the reliance on alternative energy systems for electricity production. Under such circumstances, the extension of tax stimuli sounds logical. EXPIRE’s fate is still unclear but businesses have options to choose among. Though applying for financial assistance may be a lengthy process, it will deliver sufficient benefits that will justify the time and effort.

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