BOMA International leads the real estate industry in promoting voluntary efforts to improve energy efficiency for commercial properties. To that end, BOMA International encourages real estate owners and managers to take advantage of tax incentive programs that utilize proven technologies and procedures and make business sense.
The new law provides for an accelerated tax deduction that is the lesser of the cost of installing “energy efficient commercial property” or $1.80 per square foot. As defined in the law, energy efficient commercial property is property:
- With respect to which depreciation (or amortization in lieu of depreciation) is allowable,
- Which is installed on or in any building which is located in the United States, and within the scope of ASHRAE Standard 90.1-2001,
- Which is installed as part of the interior lighting systems; the heating, cooling, ventilation, and hot water systems; or the building envelope, and
- Which is certified as being installed as part of a plan designed to reduce the total annual energy and power costs with respect to the interior lighting systems, heating, cooling, ventilation, and hot water systems of the building by 50 percent or more in comparison to a reference building which meets the minimum requirements of Standard 90.1-2001.
Energy costs refer only to heating, cooling, lighting and water heating, since only these uses are within the scope of the ASHRAE Standard and within the control of the building designer/operator.
Partial credit for individual systems is also provided in the new law. A deduction of up to $0.60 per square foot will also be available for upgrades to each of the three energy-using systems of the building - the lighting systems; the heating, cooling, ventilation and water heating systems; and the building envelope (adding up to the full $1.80/sf that is available for new construction if qualifying retrofits are made to each of the three subsystems). Again, a qualifying building can be any type of commercial building that falls under the scope of the ASHRAE 90.1 Standard, including residential properties of four or more stories. Energy efficient property must be put into place between January 1, 2006 and December 31, 2007 to qualify for the deduction.
IRS has issued interim guidance (Notice 2006-52) which sets forth a process that allows a taxpayer who owns, or is a lessee of, a commercial building and installs property as part of the commercial building’s interior lighting systems, heating, cooling, ventilation, and hot water systems, or building envelope to obtain a certification that the property satisfies the energy efficiency requirements. The notice also provides for a public list of software programs that must be used in calculating energy and power consumption.
In order to claim the deduction, the taxpayer must obtain a certification from a “qualified individual” that the required energy savings will be achieved. A “qualified individual” is defined as an individual that is not related (i.e., not an employee of the building/company); is an engineer or contractor that is properly licensed as a professional engineer or contractor in the jurisdiction in which the building is located; and has represented to the taxpayer that he or she has the requisite qualifications to provide the certification required or to perform the inspection and testing.
The IRS notice also prescribes the content of the certification. In addition to several other statements that the qualified individual must provide for the taxpayer’s records, he/she must include a statement that the energy efficient property has been, or is planning to be incorporated into the building will reduce the total annual energy and power costs with respect to the combined usage or the building’s heating, cooling, ventilation, hot water, and interior lighting systems by 50 percent or more as compared to a Reference Building that meets the minimum requirements of Standard 90.1-2001 (for new construction or a building retrofitting all three subsystems) or that the property/upgrades incorporated into the building will reduce the total annual energy and power costs with respect to the combined usage or the building’s heating, cooling, ventilation, hot water, and interior lighting systems by 16 2/3 percent (one-third of the 50% reduction) or more as compared to a Reference Building that meets the minimum requirements of Standard 90.1-2001 (for a building retrofitting any one of the three subsystems).