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Take advantage of green building tax benefits; both businesses and individuals could benefit

By Shannon Affholter
Business Planning

In the past few years, several federal tax incentives for designing and constructing energy-efficient residential and commercial buildings have been extended and enhanced.

Some of these measures also benefit businesses and individuals who want to remodel existing homes and workplaces to save on energy and taxes.

Too often, a flurry of government activity can overwhelm taxpayers and their advisers with new provisions. As a result, taxpayers who could benefit from the deductions and credits might not be aware of them and may miss out on substantial savings.

The following recent federal provisions I’m presenting here can help builders, architects, and anyone in the market for a new building or energy-saving retrofit.

These are by no means all the tax incentives available for energy-efficient building or remodeling, but they’re a great place to start your research.

Internal Revenue Code (IRC) 179D provides a deduction of up to $1.80 per square foot for energy-efficient features of a commercial building’s construction or retrofit.

The taxpayer must secure an analysis by a qualified person who uses software approved by the IRS but this important deduction effectively accelerates depreciation deductions that would have otherwise been spread over 39 years, and it reduces the tax basis accordingly.

Qualifying commercial buildings can also include multifamily residential structures, provided they have more than three stories above grade.

Three primary building components are analyzed to determine the qualifying credit, with each available for a deduction of $0.60 per square foot: interior lighting systems, HVAC (heating, ventilation, and air conditioning) systems, and the building envelope, which is the building’s outer shell.

An interesting application of this benefit occurs when the building is owned by a government agency, public school district, or local municipality. Although Congress intended to encourage energy-conscious construction, many felt that because tax-exempt government agencies own many energy-efficient buildings across the country, the impact of the incentive would be dramatically reduced.

To address this concern, Congress decided to allow building designers, including architects and general, electrical, and mechanical contractors, to take the deductions, even though the designers have no ownership interest in the property.

The IRC 25C credit for non-business property expands from 10 percent to 30 percent of qualifying improvements in 2010, with a lifetime cap per taxpayer of $1,500.

Qualifying improvements include installing insulation materials; exterior windows and doors; central air conditioners; natural gas, propane, or oil water heaters or furnaces; hot water boilers; electric heat pump water heaters; certain metal roofs and stoves; and advanced main air circulating fans.

These improvements only qualify if they are made to existing homes. The improvements must also meet certain efficiency guidelines published by the IRS.

Also, the IRC 25D credit for residential property allows increased credits for installing state-of-the-art, energy-efficient systems in new or existing homes through 2016.

A 30 percent tax credit is available for geothermal heat pumps, solar panels, solar water heaters, and small wind energy systems. This credit applies to the cost of labor and installation, as well as the cost of the equipment in connection with any residence used by the taxpayer.

An IRC 25D credit is also available for qualified fuel cell systems installed in the taxpayer’s primary residence. Unlike other residential energy efficient systems, fuel cells are limited to $500 per half-kilowatt of capacity.

It is crucial to do a little research before installing new energy-efficient systems.

According to Russ Kimball, owner of Evergreen State Heat & AC, “we have been very active in the residential market selling energy-efficient heat pumps, gas furnaces, and geothermal systems that qualify for tax incentives. But not all equipment is certified, so it is very important for property owners to choose energy-efficient systems that meet the federal specifications for the tax benefits.”

To determine whether you qualify for energy-efficient tax benefits, speak with your CPA to learn more about the details of green building incentives.

If there is an opportunity for you, your CPA should get in touch with a firm that does energy efficiency studies and has the IRS-approved software.

Making the effort this year to research green building incentives can be advantageous in many ways — in addition to helping the environment, you just may be able to benefit financially by reducing your personal or business’s tax and energy expenses.

Shannon Affholter is a Business Development Executive with Moss Adams LLP who deals primarily with business and management planning. He can be reached at shannon.affholter@mossadams.com or at 425-259-7227.