Tax Deductions for Energy Efficiency Upgrades

In 2005, President Bush signed the Energy Policy Act (EPACT), which provided for Federal tax incentives for businesses that enact energy efficiency and savings projects in commercial buildings. This law has been renewed several times, the latest in 2015, extending the tax benefits through year-end 2016. In general, commercial building owners and tenants who purchase and install products in their buildings that save energy may qualify for tax deductions up to a maximum of $1.80 per square of the affected space.

The deduction may be taken only for energy savings projects or upgrades that impact the following building systems:

• Lighting system
• HVAC system including hot water systems
• Building envelope

The building must achieve a 50% reduction in annual energy costs as compared to a base building defined by ASHRAE Standard 90.1-2007, for projects involving all three eligible systems. For projects that involve only one or two of the eligible systems, reduced percentage reductions are established by IRS guidelines in order to be eligible for a pro-rated tax deduction of $.60 per square foot per system. Additions to existing buildings or alterations to existing buildings qualify, with the tax deduction rate applied to the new or retrofitted square footage areas of the building.

There are many types of projects that might qualify for the tax deduction including:

• Continuous insulated roofing upgrades
• Lighting retrofits
• Motion sensors
• HVAC economizers
• Exhaust energy recovery systems

Once the project is complete, the building owner or tenant must demonstrate that the project or upgrade has met the established energy savings by way of a third party inspection. The IRS sets forth the criteria for inspectors as well as the process and reporting forms required. In addition, the inspector must use Department of Energy (DOE) certified software in order to calculate energy use rates. The owner or tenant claiming the deduction must maintain the inspection report.

Speer Mechanical helps building owners design, build, and upgrade systems to help make their buildings more efficient to earn tax credits. Contact us at 614.261.6331 to learn the many ways we can help, or visit our Energy Services page.

Click IRS Notice 2012-26 for additional guidance on the deduction for energy efficient commercial buildings.

Or, click here to view the National Renewable Energy Laboratory’s Energy Savings Modeling and Inspection Guidelines for Commercial Building Federal Tax Deductions Technical Report.