Take deduction for energy-efficient improvements to commercial buildings

To our Clients and Friends,

Commercial building owners get a tax deduction if they install Energy-efficient Commercial Building (EECB) property, whether the building is newly constructed or already in existence.

Tenants also can qualify if they make construction expenditures for EECB property. The deduction is the lesser of (1) the cost of the EECB property or (2) a limit based on the building’s square footage.

EECB property is depreciable property that is (1) installed on a commercial building in the U.S.; (2) part of the (a) interior lighting system; (b) heating, cooling, ventilation, and hot water systems; or (c) building envelope; and (3) certified that it is installed as part of a plan designed to reduce these systems’ overall energy costs compared to minimum energy-efficiency standards.

Inflation Reduction Act changes potentially boost energy deduction after 2022

For property placed in service after 2022, the minimum required savings in annual power and energy costs needed to qualify as EECB property is 25%.

If prevailing wage and apprenticeship requirements (discussed later) are met, the maximum deduction is $2.50 per square foot if a 25% reduction is certified. This maximum deduction goes up by $0.10 for each additional percentage of reduction, to a maximum $5.00 per square foot.

So, assuming the wage and apprenticeship requirements are met, EECB property that is certified to save 50% or more in energy costs qualifies for a maximum $5.00 per square foot deduction. Note these amounts are to be adjusted annually for inflation.

If the wage and apprenticeship requirements are not met, the maximum deduction for EECB property placed in service after 2022 is $0.50 per square foot for a 25% reduction in costs. This maximum deduction is increased by $0.02 per square foot for each additional percentage of reduction, up to a total maximum deduction of $1.00 per foot.

Wage and apprenticeship requirements for energy projects

In general, taxpayers can satisfy the prevailing wage requirement by ensuring that all workers on a project are paid at least the prevailing rate, as most recently determined by the Department of Labor (DOL). To meet the apprenticeship requirements, taxpayers must ensure that at least 12.5% (for installation of EECB property that begins in 2023) of the work is performed by qualified apprentices.

Observation:  Not meeting the wage and apprenticeship requirements drastically reduces the deduction for EECB property. But even a $1.00 per square foot deduction is nothing to sneeze at.

Next steps

If you are planning to build or upgrade a commercial building and are interested in taking advantage of this tax break, you should talk to your contractor.

Let them know that you are interested in the tax deduction for EECB. They should be able to advise you on costs and obtaining the necessary certification.

In addition to saving on your building’s energy costs, we want to be sure you get any tax break coming to you. Please let us know if we can help you.

Sincerely,

The Pinnacle CPA Advisory Group