Energy-Efficient Commercial Buildings Tax Deduction

Summary

Note: The Taxpayer Certainty and Disaster Tax Relief Act of 2020 reinstated this tax deduction and made it permanent. It also included a new section which allows the deduction to be adjusted annually for inflation. Section 13303 of The Inflation Reduction Act of 2022 (H.R. 5376) further modified the deduction by modifying the value of the deduction, changing the energy efficiency requirements, and establishing a bonus deduction value for projects that meet certain prevailing wage and apprenticeship requirements. The bill also established a mechanism for the tax deduction for buildings owned by tax-exempt entities to be claimed by the person primarily responsible for designing the property. These changes are effective January 1, 2023. The summary below describes the tax deduction as it is currently available, and will be updated after the changes from H.R. 5376 take effect.   

The federal Energy Policy Act of 2005 established a tax deduction for energy-efficient commercial buildings applicable to qualifying systems and buildings placed in service from January 1, 2006, through December 31, 2007. This deduction was subsequently extended several times, and is now permanent.

A tax deduction of $1.80 per square foot is available to owners of new or existing buildings who install (1) interior lighting; (2) building envelope, or (3) heating, cooling, ventilation, or hot water systems that reduce the building’s total energy and power cost by 50% or more in comparison to a building meeting minimum requirements in the most recent ASHRAE Standard 90.1. Energy savings must be calculated using qualified computer software approved by the IRS. 

Deductions of $0.60 per square foot are available to owners of buildings in which individual lighting, building envelope, or heating and cooling systems meet target levels that would reasonably contribute to an overall building savings of 50% if additional systems were installed.

The deductions are available primarily to building owners, although tenants may be eligible if they make construction expenditures. In the case of energy efficient systems installed on or in government property, tax deductions will be awarded to the person primarily responsible for the system's design. Deductions are taken in the year when construction is completed.

The IRS released interim guidance (IRS Notice 2006-52) in June 2006 to establish a process to allow taxpayers to obtain a certification that the property satisfies the energy efficiency requirements contained in the statute. IRS Notice 2008-40 was issued in March of 2008 to further clarify the rules. NREL published a report (NREL/TP-550-40228) in February 2007 which provides guidelines for the modeling and inspection of energy savings required by the statute.