Tax
Benefit of Green Building Incentives - Special Rule for Government-Owned
Buildings
In the past several years, several federal tax incentives have been extended
and enhanced for designing and constructing energy efficient buildings. The
Energy Policy Act of 2005 allows a deduction for the cost of certain energy
efficiency improvements installed on or in a depreciable building located in
the U.S., effective for improvements placed in service after December 31,
2005 and before January 1, 2014.
For commercial buildings, Internal Revenue code section 179D provides a deduction of up to $1.80 per square foot for energy efficient features of the building’s construction or retrofit. The taxpayer must secure an analysis by a qualified person using software prescribed by the IRS. This deduction is effectively an acceleration of depreciation deductions that would have otherwise been spread over a 39-year recovery life, and reduces tax basis accordingly.
Three primary building components are analyzed to determine the qualifying credit, with each available for a deduction of 60 cents per square foot:
-
Interior lighting systems
-
HVAC (heating, ventilation and air conditioning) systems
-
Building envelope (defined as the outer shell used to protect the indoor environment as well as to facilitate its climate control)
An
interesting application of this benefit occurs when the building is owned by
a government, school or municipality. Since the intent of Congress was to
encourage energy conscious construction and many energy efficient buildings
across the country are owned by government agencies (which of course do not
pay taxes), there was concern that the impact of the incentive would be
dramatically reduced since it was not useful for these properties.
To address this concern, Congress made the unusual decision to allow the
building owner to allocate the deduction to the person primarily responsible
for designing the property (the designer), even though such person has no
ownership interest in the property. A designer is defined as a person that
creates the technical specifications for installation of energy efficient
commercial building property. A designer may include an architect, engineer,
contractor, environmental consultant or energy services provider who creates
the technical specifications for a new building or an addition to an
existing building that incorporates energy efficient commercial building
property.
If more than one designer is responsible for creating the technical
specifications for installation of energy efficient commercial building
property on or in a government-owned building, the owner of the building
shall:
(1) determine which designer is primarily responsible and allocate the full
deduction to that designer, or
(2) at the owner's discretion, allocate the deduction among several
designers.
Before a designer may claim the deduction with respect to property installed
on or in a government-owned building, the designer must obtain written
allocation for the owner. A designer is not required to attach the
allocation to the return on which the deduction is taken. However, income
tax regulations require that taxpayers maintain records that are sufficient
to establish the entitlement to and amount of any deduction claimed.
For additional information about this tax benefit, please contact
Chris Mayfield.
Work-In-Process is provided by
Somerset for our clients and other interested persons upon request.
Since technical information is presented in generalized fashion, no
final conclusion on these topics should be made without further review.
For additional information on the issues discussed,
please contact
Ken
Hedlund,
Jay Feller,
Steve George,
Chris
Mayfield or
Rebecca Ogle
of our
Construction & A/E Team.
This document is not intended or written to be used, and cannot be used,
for the purpose of avoiding tax penalties that may be imposed on the
taxpayer.
Somerset CPAs,
P.C.
3925 River Crossing Parkway, Third Floor
Indianapolis, Indiana 46240
317.472.2200 • 800.469.7206 • FAX 317.208.1200
www.IndianaConstructionCPAs.com
info@somersetcpas.com
