Tax Reform and the Commercial Building Tax Deduction

The future of energy-efficiency tax incentives must be considered in conjunction with the possibility of comprehensive tax reform. Attaining such reform in a divided government is a long shot, but in March the Chairman of the House Ways and Means Committee, Rep. Dave Camp (R-Mich.), established 11 working groups to examine different aspects of the tax code. Each is led by a Republican member, serving as chair, and a Democratic member, serving as vice chair, and they’re reviewing current law in their designated issue area and compiling feedback from stakeholders. This information will be processed by the Joint Committee on Taxation, which will submit a report to Ways and Means on May 6.

The goal of comprehensive tax reform in the House is to lower individual and corporate rates and pay for them by eliminating deductions and credits so that the reform is revenue neutral. Thus, energy-related credits could be eliminated including the Commercial Building Tax Deduction (CBTD), which could simply be allowed to expire at the end of this year.

The CBTD was enacted in the Energy Policy Act of 2005 (IRC Sec. 179D) and provides a building owner with a deduction of up to $1.80 per square foot of floor area for buildings that achieve 50 percent annual energy savings above ASHRAE 90.1-2001. For buildings below 50 percent placed in service Jan. 1, 2006 to Dec. 31, 2008, the deduction was prorated to 60 cents per square foot of floor area for each of three subsystems meeting a 16.66 percent annual energy savings target:

• 1) Energy Efficient Lighting Property
• 2) Energy Efficient Heating, Cooling, Ventilation and Hot Water Property
• 3) Energy Efficient Building Envelope Property

IRS Notice 2008-40 established new subsystem percentages of 20 percent for lighting, 20 percent for HVAC and 10 percent for the envelope for property placed in service Jan. 1, 2006 to Dec. 31, 2013. These percentages could be used as an alternative to the 16.66 percent formula, which expired Dec. 31, 2008. However, on Feb. 23, 2012, the IRS issued a modification to Notice 2008-40 (Notice 2012-22) to provide an additional set of energy-saving percentages for subsystems of 25 percent for lighting, 15 percent for HVAC and 10 percent for the envelope. These percentages are available for property placed in service on or after the March 12, 2012, effective date of the notice through Dec. 31, 2013, and taxpayers may use the 20-20-10 or the 25-15-10 percentages until that time.

IRS Notice 2006-52 provides the process by which a taxpayer who owns a commercial building and installs energy-efficiency property can obtain certification and claim the credit. In addition, Notice 2006-52 provides for a public list of software programs (maintained by the U.S. Department of Energy) to calculate energy and consumption for purposes of Sec. 179D.

An in-place building or system must be certified by a qualified individual through inspection (and testing, if applicable) to confirm the building or system meets the savings goals. A qualified individual must perform calculations using approved software and be an engineer or contractor licensed in the jurisdiction where the building is located. The procedures should be performed according to the aforementioned IRS Notices (available at www.irs.gov), and the qualified individual can illustrate compliance by using ASHRAE’s Interactive 90.1-2001 Compliance Forms.

The person or company that pays for the construction is eligible to take the deduction, and building or subsystem property has to be placed in service between Jan. 1, 2006, and Dec. 31, 2013, (CBTD was extended by the Emergency Economic Stabilization Act of 2008 through Dec. 31, 2013). Also, there is no specific IRS form for claiming the tax deduction and the deduction can be listed on the “Other deductions” line of the appropriate business tax form. Certifications and calculations do not need to be included with the tax return, but the IRS advises taxpayers to keep all documents on file for recordkeeping purposes.

Again, the odds are against comprehensive tax reform being enacted this year so it’s a distinct possibility that the CBTD and other energy-efficiency tax incentives could be renewed through 2014. But it’s important to note that in addition to the House Ways and Means Committee, the Senate Finance Committee also is engaged in the process of formulating a comprehensive tax reform plan. In this case, the Finance Committee has been working as a whole to reach a consensus. However, Committee Chairman Max Baucus (D-Mont.) has met individually with committee members and Democratic and Republican staff are working as a team to develop a list of options that are acceptable to both sides of the aisle. When these options are made public, they will be an indicator of the viability of the CBTD and other tax incentives.