The IRS this week issued guidance (Notice 2008-40) concerning thededuction for energy efficient commercial buildings under section 179D of the Internal Revenue Code, including guidance regarding the deduction allocable to designers of government-owned buildings.
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: (i) interior lighting systems, (ii) heating, cooling, ventilation, and hot water systems, or (iii) 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% or more in comparison to a reference building meeting the minimum requirements of ANSI/ASHRAE/IESNA Standard 90.1-2001.
Allocation of Deduction for Government-Owned Buildings
As required by section 179D, the new guidance 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. For this purpose, the designer is the person who created the technical specifications for the installation of energy efficient commercial building property (e.g., an architect, engineer, contractor, environmental consultant or energy services provider). A person who merely installs, repairs, or maintains the property is not a designer. If there is more than one designer, the building owner may allocate the deduction either to the designer who is primarily responsible or among several designers. The allocation of the deduction must be in writing and must meet other specified requirements.
Changes to Rules for Partially Qualifying Property
Section 179D also allows a more limited deduction for property (partially qualifying property) that meets lower energy savings targets. Under prior IRS guidance, partially qualifying property in a qualifying system had to reduce total energy costs by 16 2/3% to qualify for the limited deduction. Under the new guidance, taxpayers generally may apply either the old energy savings targets or the following targets: a 10% reduction in energy costs for the interior lighting systems; a 20% reduction for the heating, cooling, ventilation, and hot water systems; and a 20% reduction for the building envelope. 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.
Other Changes
The IRS guidance also (1) clarifies and amends rules applicable to the qualified software that must be used to calculate the energy cost reductions, (2) creates an exemption from the qualified software requirements for property qualifying under an interim lighting rule, (3) specifies the certification requirements applicable to the interim lighting rule, and (4) expands the application of the interim lighting rule to unconditioned garage space.If you have any questions about this bulletin or if you would like our assistance in qualifying for or complying with the new guidance, please contact your Stoel Rives attorney.
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