CHICAGO — Uncle Sam, in the form of our tax laws, wants to reward every laundry business that improves the energy efficiency of the building housing its business or plant. In fact, all so-called “commercial buildings” may qualify for this unique tax deduction. Even those that only partially improve energy efficiency may qualify, albeit with a smaller deduction.
While there is some question whether tenants can claim this credit, new guidelines from the Internal Revenue Service make it easier than ever to claim even the partial deduction.
ENERGY-EFFICIENT COMMERCIAL BUILDING DEDUCTIONS
Our tax rules allow a deduction for a portion of the costs of installing energy-efficient systems in a commercial building. The maximum deduction is generally $1.80 per square foot, less the total amount of any deductions claimed in earlier years. Qualified systems include interior lighting, heating, cooling, ventilation, hot water systems, and the building’s envelope. Best of all, the deductions don’t expire until Dec. 31, 2013.
The deduction of up to $1.80 per square foot is available to owners or tenants of new or existing commercial buildings that are constructed or reconstructed to save at least 50% of the heating, cooling, ventilation, water heating, and interior lighting energy costs.
Partial deductions of 60 cents per square foot are also available for improvements to any building system that reduces total heating, cooling, ventilation, water heating and interior lighting energy use by a specified—and recently changed—percentage.
COMMERCIAL BUILDING DISCRIMINATION
It is no secret that our tax rules have long treated commercial property less favorably than residential property. Today, however, tax breaks are available that create significant incentives for making “commercial” buildings more energy-efficient.
The incentive comes in the form of a tax deduction. The unique Energy Efficient Commercial Building Deduction (EECBD) is already rewarding many commercial building owners—and tenants.
Under EECBD, a laundry or dry cleaning business can claim tax deductions for new or renovated buildings that save 50% or more of projected annual energy costs for heating, cooling and lighting compared to model national standards. Partial deductions are available for efficiency improvements to individual lighting, HVAC and water heating, or envelope systems.
Commercial property is generally defined as property intended for use by retail, wholesale, office, hotel or service users or for manufacturing or other industrial purposes. Examples include shopping centers, office buildings, hotels and motels, resorts or restaurants, and, of course, laundry and dry cleaning buildings and plants.
THE REFERENCE BUILDING
Before any laundry owner can claim the EECBD deduction for energy-efficient systems installed in a commercial building, they must obtain certification. Although guidance issued by IRS explains how to calculate a building’s square footage, when a building is considered placed in service, and more, a licensed contractor or engineer must verify the building or portion of the building being submitted is better than the American Society of Heating, Refrigeration and Air Conditioning Engineers’ (ASHRAE) Standard 90-1-2001.
For purposes of the EECBD, the “Reference Building” is a building that is located in the same climate zone as the laundry or dry cleaning plant building and is otherwise comparable to it except that its interior lighting systems, heating, cooling, ventilation, and hot water systems, and building envelope meet the minimum requirements of the ASHRAE 90.1-2001 standards.
Rather than a deduction for the actual cost of the systems or equipment purchased to make a commercial building at least 50% more energy efficient, a flat tax deduction of up to $1.80 per square foot is available. Remember, however, the improvement must save at least 50% of the heating, cooling, ventilation, water heating and interior lighting energy cost. A partial deduction of 60 cents per square foot can be taken for improvements made to one of three building systems—the building envelope, lighting or heating, and cooling system.
The deduction applies to “energy-efficient commercial building property,” defined as depreciable property installed as part of a building’s (1) interior lighting systems, (2) heating, cooling, ventilation and hot water systems, or (3) the building’s envelope as part of a certified plan to reduce the total annual energy and power costs to a reference building that meets specified minimum standards.
The Department of Energy maintains a list of the software that must be used to calculate power consumption and energy costs for purposes of certifying the required energy savings necessary to claim the deduction. With only buildings covered by the scope of the ASHRAE Standard 90-1-2001 eligible, seeking professional assistance is almost mandatory.
The person or organization that makes the expenditure for construction is generally the recipient of the allowed tax deductions. This is usually the building’s owner, but for some HVAC or lighting efficiency projects, it could be the tenant.
Thursday in Part 2: Write-off complexities, partial deduction basics, and who gets the credit?
Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult a tax adviser for advice regarding your particular situation.