Section 179D allows a federal income tax deduction for the cost of certain energy efficient property installed in a commercial building and placed in service after 2005 and before 2009. The amount of the deduction for a particular year generally is equal to the cost of qualifying energy efficient property placed in service during the year, subject to a lifetime cap per building of $1.80 per square foot.

To qualify, property must be installed as part of one of three types of qualifying systems: interior lighting systems; heating, cooling, ventilation, and hot water systems; or building envelope.

In addition, the property must be part of a plan that reduces total annual energy and power costs of the interior lighting systems and heating, cooling, ventilation, and hot water systems by 50 percent or more in comparison to a reference building meeting the minimum requirements of ASHRAE Standard 90.1-2001.

Section 179D also allows a more limited deduction for partially qualifying property that meets lower energy savings targets. Under the new guidance, taxpayers may apply energy savings targets of 10 to 20 percent, depending on the type of system. The new IRS guidance also clarifies that a deduction for partially qualifying property is limited to the sum of the deductions allowable for any two qualifying systems.

The new guidance also describes how the deduction for energy efficient commercial building property installed in a building owned by a federal, state, or local government may be allocated to the designer of the building (e.g., an architect, engineer, contractor, environmental consultant or energy services provider). If there is more than one designer, the building owner may allocate in writing the deduction either to the designer who is primarily responsible or among several designers.

The IRS guidance also clarifies and amends rules applicable to the software that must be used to calculate the energy cost reductions.

Thanks to the law firm of Stoel Rives for the information in this article.