Fall 2009

Tax Benefit of Green Building Incentives - Special Rule for Government-Owned Buildings

In the past several years, several federal tax incentives have been extended and enhanced for designing and constructing energy efficient buildings. The Energy Policy Act of 2005 allows a deduction for the cost of certain energy efficiency improvements installed on or in a depreciable building located in the U.S., effective for improvements placed in service after December 31, 2005 and before January 1, 2014.

For commercial buildings, Internal Revenue code section 179D provides a deduction of up to $1.80 per square foot for energy efficient features of the building’s construction or retrofit. The taxpayer must secure an analysis by a qualified person using software prescribed by the IRS. This deduction is effectively an acceleration of depreciation deductions that would have otherwise been spread over a 39-year recovery life, and reduces tax basis accordingly.

Three primary building components are analyzed to determine the qualifying credit, with each available for a deduction of 60 cents per square foot:

An interesting application of this benefit occurs when the building is owned by a government, school or municipality. Since the intent of Congress was to encourage energy conscious construction and many energy efficient buildings across the country are owned by government agencies (which of course do not pay taxes), there was concern that the impact of the incentive would be dramatically reduced since it was not useful for these properties.

To address this concern, Congress made the unusual decision to allow the building owner to allocate the deduction to the person primarily responsible for designing the property (the designer), even though such person has no ownership interest in the property. A designer is defined as a person that creates the technical specifications for installation of energy efficient commercial building property. A designer may include an architect, engineer, contractor, environmental consultant or energy services provider who creates the technical specifications for a new building or an addition to an existing building that incorporates energy efficient commercial building property.

If more than one designer is responsible for creating the technical specifications for installation of energy efficient commercial building property on or in a government-owned building, the owner of the building shall:

(1) determine which designer is primarily responsible and allocate the full deduction to that designer, or
(2) at the owner's discretion, allocate the deduction among several designers.

Before a designer may claim the deduction with respect to property installed on or in a government-owned building, the designer must obtain written allocation for the owner. A designer is not required to attach the allocation to the return on which the deduction is taken. However, income tax regulations require that taxpayers maintain records that are sufficient to establish the entitlement to and amount of any deduction claimed.

For additional information about this tax benefit, please contact Chris Mayfield.

Work-In-Process is provided by Somerset for our clients and other interested persons upon request. Since technical information is presented in generalized fashion, no final conclusion on these topics should be made without further review. For additional information on the issues discussed, please contact Ken Hedlund, Jay Feller, Steve George, Chris Mayfield or Rebecca Ogle of our Construction & A/E Team. This document is not intended or written to be used, and cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer.

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