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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Begun Construction Provisions

Prior to the modifications that were introduced in 2012, the section 45L taxation credit was available solely for a qualified energy facility placed in service prior to the end of December 2014.

The problem is that energy efficiency projects will quite often require a longer period of time in order to be completed. This is one of the main reasons for the changed conditions that have been included in the American Taxpayer Relief Act of 2012.

The older requirement for facilities that have to be placed in service prior to the end of the term was replaced with a requirement for the construction of the energy efficient building to begin prior to the end of the year. Such constructions can qualify for the taxation incentives provided under section 45L.

Definition of Begun Construction

The next important question that will need to be answered in connection to the 45L credit is what projects correspond to the begun construction requirement. The IRS website is quite helpful in this regard, providing a lot of information about the specifics for begun constructions.

There are two main ways for determining when the construction of the facility has begun. The first is physical work of a significant nature. Physical work of a significant nature is defined as work on the construction that has been started either by the eligible taxpayer or by employees doing work for this person. On-site and off-site work both qualify as physical work of a significant nature.

This category does not include any preliminary work on the building. Design, for example, will not quality the building for the section 45L credit. Research, licensing, obtaining permits, looking for finances and securing will also not qualify.

The second requirement is meeting the safe harbor requirements. Under this requirement, the taxpayer should have incurred five percent or more of the total construction cost prior to December 31, 2014. In addition, IRS has to make sure that the taxpayer is making continuous efforts towards the completion of the project. There may be certain interferences that will be excluded from consideration. Such interferences include:

• Severe weather that stands in the way of safe construction work
• Natural disasters
• Labor stoppages, strikes and other employment-related problems
• Inability to obtain all of the necessary equipment for construction purposes
• Supply shortages
• Financial delays that can reach up to six months
• Delays based on requests from either state or federal agencies

These are the most important criteria that have to be met for begun construction to be considered. The IRS website features additional information about more specific scenarios and how to determine whether these will stand in the way of obtaining the 45L credit.

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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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The popularity of solar equipment is growing all the time, particularly in areas that see a big number of sunny days per year. Apart from providing an opportunity for green energy production, solar panels can also be used for energy efficient water heating.

The execution of such projects delivers a vast range of benefits going beyond the energy efficient home credit. Here are some of the most important advantages to consider.

Diminished Use of Energy

Conventional water heaters need a lot of energy, which can add up to a large annual amount. According to the Solar Energy Laboratory at the University of Wisconsin, a four-member family consumes 6,400 kilowatt hours of electricity per year for water heating.

Solar equipment reduces that significant amount. In addition, it will reduce the carbon footprint of water heating. The conventional electric water heater is responsible for eight tons of carbon dioxide emissions per year. It’s easy to see how the use of solar equipment is both cost-efficient and environment-friendly.

The cost-effectiveness of such systems will depend on location and the number of sunny days per year. These factors have to be taken in consideration, if you’re considering this possibility for getting access to an energy efficient home credit.

Reduced Cost of Equipment

Photovoltaics used to be very costly a couple of years ago. Today, the technology is readily accessible and more affordable than ever.

A residential solar water heating system will range in cost from 1,500 to 3,500 dollars, depending on its size and the water heating needs of the household. In this sense, electric and gas heaters are much less expensive.

The electricity savings that solar water heating produces, however, will bring a great return on investment. Depending on the location and the use of the system, solar water heaters will pay themselves off in four to eight years. The lifespan of such equipment ranges from 15 to 30 years, which makes it one of the most affordable options on the market.

A Few Shortcomings to Keep in Mind

Solar water heating is a great possibility if you’re interested in obtaining an energy efficient home credit but it’s far from a universal solution. There are a few shortcomings and limitations to consider in advance.

Many areas that see a cold and snowy winter will require the selection of a backup water heating system. Photovoltaic systems are not reliable 365 days per year. Fuel or gas backups are the most commonly selected options.

The solar panels have to be protected against low temperature and freezing. Thus, you’ll need to keep wintertime maintenance in consideration.

Finally, a tank will be required for water collection. This tank could get quite heated during the summer days. Choosing the right location for its placement will be essential.

The execution of such projects will qualify you for an energy efficient home credit in the period until the end of 2016. You can claim a credit of up to 30 percent of the equipment’s cost. On-site preparation, assembly and labor costs are included in the calculation. Do your research and make sure you understand the possibilities before picking solar water heating or another type of green technology for your home.

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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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Property Requirements

The section 45L credit is available for residential projects executed on the territory of the US. The property should have been completed and occupied prior to December 31, 2014.

The dwelling unit should be located in a building that is at most three-stories high. In other words, the incentive applies to the construction of apartment buildings and residential condominiums or the rehabilitation of older such buildings.

To qualify for a section 45L incentive, the building should have heating and cooling energy consumption that is 50 percent lower than the one of a comparable residential unit. Third party certification will be needed to prove the energy efficiency of the building.

Who can Get the 45L Credit

The eligible contractor is the one that can claim the energy efficiency taxation incentive for 2014.

The contractor is defined either as the individual who constructed the new residential unit or the manufacturer of an energy efficient manufactured home.

Energy Savings

In order to qualify for the taxation incentive, the dwelling unit should have energy consumption that’s 50 percent lower than the requirements listed in the 2006 International Energy Conservation Code.

The 2006 energy conservation code features requirements and prescriptions for both commercial and residential energy-efficient buildings. These focus on roofing materials, floors, fenestration, opportunities for reducing air leakage, HVAC equipment performance and lighting.

If the building is independently certified to correspond to these requirements, the contractor will be eligible for a home tax credit of up to 2,000 dollars.

Qualification and Application Process

If you believe that your 2014 dwelling unit project corresponds to the above mentioned requirements, you’ll need to ask for an independent evaluation and certification. The parties responsible for the process use accredited software to make the energy savings calculations.

The energy features of the dwelling unit will also have to be inspected and assessed on site.

Don’t hesitate to seek certification, especially if you executed a larger project in 2014. Several case studies show that the amount provided under section 45L can be impressive. According to one of the case studies, a contractor that constructed 83 dwelling units (all of which adhering to the energy efficiency requirements) got a tax credit of 166,000 dollars for the entire project. The project certification fee in this case was 36,000 dollars and the net benefit was 144,000 dollars.

An eligible certifier is any licensed third party that has no relationship with the contractor that has been accredited by the Residential Energy Services Network or another rating network of the same caliber.

Getting certified for a 45L credit is far from a challenging task, as long as you find a reliable partner. Many new buildings adhere to the strictest energy efficiency requirements, which qualifies them for an incentive automatically. Get started with the certification right now, if you want to make use of the incentive for your 2014 residential project.

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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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The following 2015 tax guide will acquaint you with some of the changes, as well as the incentives that you can make use of.

2014 Tax Break Extenders

This was one of the biggest news in December, 2014. The government finally decided to extend several energy efficiency incentives, including the section 45L energy tax credit. This means you can claim the amount for projects executed until December 31, 2014.

The package approved in the end of the year included nearly 50 tax breaks. The retroactive, one year extension is only valid for 2014 but some industry experts believe that new extensions will be examined by Senate shortly.

Some of the tax breaks approved in the end of 2014 include section 45L energy tax credit for new home energy efficiency, the qualified energy efficiency improvements tax credit and the section 179D energy efficient commercial building deduction.

How Much can You Claim?

An energy tax credit sounds great but what is the exact value of the incentive? It depends on the particular tax credit or deduction that you go for.

The maximum incentive you can claim under section 179D is 1.8 dollars per square foot of qualifying commercial real estate for whole building performance. Alternatively, the incentive is 0.60 dollars per square foot for building envelope improvements, HVAC improvements or lighting improvements.

Under section 45L energy tax credit conditions, you can expect an incentive that totals 2,000 dollars per unit for a newly-constructed residential building that is either rental or owner-occupied. Since the energy efficiency requirements for new residential buildings have become stricter over the past years, many buildings will qualify for the energy tax credit automatically. Check the conditions, if you have executed a residential project in 2014 – chances are that you’ll benefit from an attractive taxation incentive.

How to Get the Energy Tax Credit

Getting the energy tax credit, whether for a residential or a commercial project, is a relatively simple tax. For a start, you’ll need to have the building assessed independently. It will need to correspond to certain energy efficiency requirements and the test is performed by a third party.

Whether you’re a homeowner or an investor, you’ll need to have a good idea about the right IRS form to use. The form has to be filled out correctly and submitted with your taxes. You can find more information about the forms and the information that you need to provide on the IRS website.

Finally, understand the credit maximums and the particular incentives that can be carried forward. Some of the energy efficiency tax credits can be carried over to coming years, in case they exceed the amount you owe in taxes.

Apart from giving these incentives a try, you may also look for state and local programs encouraging energy efficiency improvements. These may save you even more money and enable you to get the best possible return on your investment.

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What does the future have to hold for this kind of electricity production? Homeowners and other individuals interested in executing sustainability projects involving solar property have a couple of great opportunities to make use of in 2015.

The Residential Renewable Energy Tax Credit

The Residential Renewable Energy Tax Credit gives homeowners interested in sustainability projects a stimulus for the purchase and the installation of solar property. This credit is valid for the systems that have been placed in service prior to the end of 2016.

There is no maximum energy tax credit for such systems and a homeowner can install solar property in a primary residence, a second home or a vacation property. Incentives are also available for the homeowners that install solar water-heating property.

The rebate amount under this incentive is 30 percent of the qualified expenditure for system purchase, labor costs and installation.

If the credit is higher than the amount that an individual owes in taxes, it can be carried forward to the next year. It’s unclear whether any unused credit will be carried forward after the end of the program in 2016.

Opportunities for Commercial System Installations

Tax credits for solar system purchases are also available for commercial installations. The solar investment tax credit is also available through the end of 2016 and it applies to the installation of both photovoltaic energy production systems and water heating equipment. There could be some differences between the energy tax credit available for residential and the one for commercial entities. Talking to a tax professional about the rules, as well as about the ability to carry the tax credit forward is the best policy in terms of maximizing the benefits from the opportunity.

Other Initiatives and Benefits of Solar Installations

Grants and other taxation incentives are available to investors interested in developing sustainable energy production through the use of photovoltaics.

State incentive programs are available and these vary from one part of the country to another. The New York State Incentive Program, for example, is available through the end of 2015. Florida is another state that has lucrative opportunities for the production of energy through solar installations. Checking local incentives, their conditions and the qualification requirements will determine whether the project will give access to some energy tax credit.

The Obama administration has proposed billions in additional funds for alternative energy production stimuli. Some of these new opportunities will probably be announced in the beginning of 2015, giving investors even better conditions for the execution of such projects.

The prominence of solar power production will continue growing in the years to come. Investing in this kind of installation right now will help you save money and give you access to additional stimuli. The energy tax credit is just one of those opportunities.

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