In recent years, the Federal government has emphasized a need for green building incentives. Accordingly, the Energy Tax Incentives Act of 2005 and the 2008 Energy Act enacted or expanded several tax incentives to encourage US businesses to design and build energy efficient buildings. Two of those buildings are as follows:
Section 179D – Commercial Developers, Real Estate Investors, and Architects
Section 179D offers a depreciation deduction of 30 cents to $1.80 per square foot for eligible improvements to commercial buildings placed in service after Jan. 1, 2006. The deduction rewards commercial developers and real estate investors for efforts to reduce energy use in the categories of building envelope; heating, ventilating and air conditioning; and interior lighting systems. Residential rental buildings also qualify for this tax deduction if the property is four stories or taller.
Ideal candidates are taxpayers who have made improvements to at least 50,000 square feet of their property. LEED (Leadership in Energy and Environmental Design)-certified buildings, Energy Star buildings, or participants in utility rebate programs, are also ideal candidates for the full deduction. The qualifying improvements range from new lighting retrofits to full-scale construction projects.
As an added benefit, a provision in the code allows the full deduction to be transferred if the retrofit or construction is for a government building. Architects that design energy-efficient buildings for the government will be eligible for a full, $1.80 per square foot deduction. Therefore, any architect designing energy efficient government buildings, schools, etc., should explore their eligibility for this incentive.
Obtaining this deduction requires a licensed professional engineer or contractor to certify that a detailed energy analysis of the property’s improvements, which typically involves energy simulation modeling and lighting power density calculations, per IRS requirements.
Section 45L – Apartment, Condominium, and Single-Family Residence Developers
Section 45L is one of the most beneficial tax incentives offered to developers of apartments, condominiums and single-family residence developers. Developers can qualify for a $2,000 federal tax credit for each energy-efficient dwelling unit constructed. For properties constructed after August 2005, the $2,000 federal tax credit can be applied toward the development of apartment units and new homes, and a $1,000-$2,000 credit can be applied for manufactured homes. For example, a developer of a 75-unit apartment complex could earn up to $150,000 in tax credits.
To qualify, each dwelling unit must provide a level of heating and cooling energy consumption significantly less than certain 2004 energy standards. Since current energy codes already provide significant improvement from 2004 energy standards, many developments built to current specifications will qualify developers for this tax credit.
Developers of Affordable Housing projects, Energy Star Homes, LEED developments, and participants in utility rebate programs are also ideal candidates for this tax credit.
The process for obtaining these tax credits also requires a detailed energy analysis that must be certified by a qualified third party.