With the threat of global climate change and the struggling economy, the government has ratcheted up efforts to promote energy-conscious building practices. As builders struggle to contain costs and enhance cash flow, these tax savings could become a key element in an economic survival strategy.
Federal tax deductions for commercial construction, originally passed in 2005 and renewed late in 2008, may allow some contractors to take generous tax allowances for their part in building or renovating commercial buildings to meet higher energy-efficiency standards. Of particular interest are government buildings, which the Obama administration has targeted for renovation and upgrades in its $800 billion economic stimulus package.
The American Recovery and Reinvestment Act also recently expanded tax incentives for homeowners and residential builders.
Government Buildings Are Key
Typically, a commercial building owner, rather than a contractor, benefits from federal energy-efficiency deductions. Government buildings are the exception because government entities do not pay taxes and cannot benefit from a tax deduction. In some cases, energy deductions on governmentowned buildings can be transferred to the contractor. Contractors may qualify for a deduction if they are responsible for creating the technical specifications for energy-saving systems, such as in design-build contracts.
Deductions are available for energy-saving buildings located in the United States and placed in service from Jan. 1, 2006, through Dec. 31, 2013. Even if the deductions were not originally taken, they still can be claimed by amending previously filed returns. (The deadline of Dec. 31, 2008, was extended through 2013 by the Emergency Economic Stabilization Act of 2008.)
This federal tax law applies to local, state and federal buildings owned by government entities. It is most commonly applied to the construction or renovation of public schools, colleges and universities, but also can apply to office buildings, courthouses and other public buildings.
Varying Deductions
In the developing green marketplace, projects may be won or lost based in part on the degree to which energy-saving materials and systems are incorporated into the design. Professionals involved in the construction process can play a critical role in promoting and designing buildings that maximize energy efficiency and tax savings. The ability to provide this expertise adds substantial value to a contractor’s services.
Qualified contractors may be able to take deductions ranging from 60 cents per square foot to $1.80 per square foot—saving from 10 percent to 50 percent on total annual energy costs compared to Standard 90.1-2001 of the American Society of Heating, Refrigeration and Air Conditioning Engineers.
Energy savings must be achieved by constructing or renovating one of three building systems—the envelope (exterior walls, floor, roof, doors, windows); interior lighting; or heating, cooling and hot water systems.
If the building does not meet the 50 percent energy savings requirement, it still may qualify for a partial deduction of 60 cents per square foot if energy costs related to these building systems are reduced by 16.7 percent. A special election for the building envelope is available if overall energy costs are reduced by10 percent, and interior lighting and heating, cooling and hot water systems are reduced by 20 percent.
Special interim rules allow a deduction of up to 60 cents per square foot for a 40 percent reduction in lighting power density. Various other requirements also must be met, but the calculation of this deduction is significantly easier and requires no other energy cost reductions within the building.
Before deductions can be claimed, contractors must obtain independent certification of energy savings from a qualified, licensed professional engineer or third-party contractor using U.S. Department of Energy-approved software.
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Friday, September 3, 2010