Going Green Pays Green Part 2

In an effort to save both money and the environment, companies are running on a much more “green” philosophy in the way they do business. One of the most common methods is by constructing green buildings.

While sometimes going green can have initial additional costs, a provision in the Energy Policy Act of 2005 is intended to offset some of the costs by possibly allowing taxpayers to take an immediate expense of the cost of property that would normally be depreciated over as many as 39 years.

The energy efficient commercial buildings deduction generally is available for energy efficient commercial building property placed in service after 2005 and before 2014. Commercial building property includes property:

  1. That depreciation is allowable;
  2. Which is installed on or in a building located in the United States that is within the scope of Standard 90.1-2001;
  3. Which is installed as part of the interior lighting systems; heating, cooling, ventilation’ and hot water systems; or the building envelope (everything that separates the interior of a building from its outdoor environment, including walls, windows, foundation, basement slab, ceiling, roof, and insulation); and
  4. Which is certified by a qualified individual in a manner to be prescribed by the Secretary as part of a plan designed to reduce the total annual energy and power costs for the building’s lighting and heating, cooling, ventilation, and hot water systems by 50% or more in comparison to a reference building that meets the minimum requirements of Standard 90.1-2001.

The methods for calculating the deduction is based on the provisions of the 2005 California Nonresidential Alternative Calculation Method Approval Manual (which can be found online at www.energy.ca.gov/title24/2005standards/nonresidential_acm/). The calculation must be prepared by qualified computer software as described in IRC Sec. 179D(d)(3).

The maximum amount that can be deducted under the provisions of IRC Sec. 179D for any tax year cannot exceed the excess of:

A. $1.80 × the square footage of the building, over

B. the aggregate amount of the IRC Sec. 179D deductions with respect to the building for all prior tax years.

If costs related to building do not meet the overall 50% energy savings test as described above, a partial allowance may be available. The partial allowance is calculated by substituting up to $.60 per square foot for $1.80 per square foot in the maximum deduction calculation.

If a deduction is allowed under IRC Sec. 179D, the basis of the energy efficient commercial building property is reduced by the amount of the deduction allowed. The reduction in basis is treated as amortization when applying the IRC Sec. 1245 recapture provisions on a subsequent disposition of the property. Similarly, the reduction in basis is treated as a depreciation adjustment when applying the IRC Sec. 1250 recapture provisions on a subsequent disposition of the property.

As you can see, there are many cost saving incentives to going green. Stay tuned for another blog that will discuss additional “green incentives” that local electric companies like Ameren are offering! So, when you think about constructing your next building, think “green.”