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By Marcia Richards Suelzer, Toolkit Staff Writer
Under a little-known Internal Revenue Code provision, if you make qualified improvements to the energy-efficiency of your commercial building, you may be able to deduct up to $1.80 per square foot in your building. The amount of your deduction varies based upon the amount of energy savings.
To claim any deduction for energy-efficient improvements, you must meet two requirements. First, the improvements must qualify as "energy efficient commercial building property." This means the improvements must be depreciable property and installed as part of:
In addition, the improvements must be certified by a qualified professional to meet technical standards for energy and power cost reduction. To determine if the improvements qualify, your anticipated energy savings are compared to a similar reference building that meets minimum specified energy standards described in Standard 90.1-2001, Energy Standard for Buildings Except Low-Rise Residential Buildings, of the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America.
Tip. The complexity in making the comparison to a "similar reference building" is one reason why this deduction is under-utilized. However, the Department of Energy is developing a simplified web-based tool for modeling common energy-efficiency upgrade measures. This web-based tool is targeted toward small businesses and is scheduled to be available in March. Its use will be approved for many common building types as a substitute for the costly modeling requirements that have burdened businesses that do not have access to comprehensive modeling tools.
In addition, the Department of Energy provides a list of qualified software for calculating commercial building energy and power cost savings that meet federal tax incentive requirements. In addition to the name and version of the software, the list includes detailed information provided by the software developer.
This type of equipment purchase is generally not immediately tax-deductible--it is depreciated over time. But if you can take advantage of this energy-efficiency tax break, the deduction will serve as a defacto write-off of part of the cost of the purchase.
Full vs. Partial Deduction
The amount of your tax deduction is based upon:
If your improvements are certified to reduce energy usage for your building's heating, cooling, ventilation, hot water, and interior lighting systems by 50 percent or more, then you can claim up to $1.80 per square foot. Once that limit has been reached, whether in one tax year or over several years, there is no deduction for additional energy-efficient expenses on that building.
If you don't achieve a 50-percent energy savings, all is not lost. You can still claim a partial deduction of $0.60 per square foot for energy-efficient improvements to one or more of your building's systems or the building envelope. In fact, if you meet the percentage improvement for more than one system, then you can claim a deduction for each system that meets the requirement, up to the maximum $1.80 per square foot limitation.
Example. Laurie owns a 20,000-square-foot commercial office building. During 2012, she makes $50,000 worth of improvements to the interior lighting system, the cooling system and the hot water system. Each of these improvements are certified as meeting the qualifying improvement percentage. She can claim a partial deduction of $0.60 per square foot for each of these improvements, up to a total deduction of $1.80 per square foot ($36,000). If she also improved the heating system, she would still only be able to deduct $1.80 per square foot.
The IRS has recently announced an alternative set of percentages that you can use to see if your improvements qualify for the deduction. The following table summarizes the energy savings percentages permitted under Notice 2008-40 and Notice 2012-22. You have the option of choosing either the Notice 2008-40 percentages or the Notice 2012-22 percentages to determine whether your energy savings are sufficient for a partial credit.
|Summary of Energy Savings Percentages Provided by IRS Guidance|
|Type of Improvement||Energy Savings Percentages permitted under Notice 2008-40||Energy Savings Percentages permitted under Notice 2012-22|
|Interior Lighting Systems||20||25|
|Heating, Cooling, Ventilation, and Hot Water Systems||20||15|
|Effective for property placed in service||January 1, 2006 - December 31, 2013||Effective date of Notice 2012-22 - December 31, 2013|
Example. In March 2012, Frank installs a new energy-efficient heating system in his 15,000-square-foot store for a 17-percent energy savings. By electing to use the percentages provided in Notice 2012-22, Frank can claim a $0.60 per square foot deduction.
Regardless of whether you are eligible for a full or a partial deduction, you can not deduct more than the cost of the improvements.
Claiming the Deduction
Despite the amount of paperwork required to establish your right to the deduction, the deduction itself is simply claimed on your federal income tax form under "Other Expenses." There is not a separate form for this credit. (For sole proprietorships, the deduction is claimed by listing the amount on Schedule C, Part V.) No supporting documentation needs to be provided with your tax return, although you must have it for your records in case your deduction is questioned.
Tip. There is no prohibition on claiming the deduction on an amended return, provided you have the records and certifications to support it. Therefore, if you did make improvements that arguably qualify for a deduction in 2009 or 2010, you may wish to explore whether amending your tax return is worthwhile.