Tax Deduction Extended

The economic-recovery package passed by Congress in fall 2007 contained some welcome news for retailers and other commercial building owners: the extension of the Commercial Buildings Tax Deduction through Dec. 31, 2013.

Previously introduced as part of the Energy Policy Act of 2005, the deduction was designed to encourage building professionals to invest in lighting, HVAC, hot water and building-envelope systems identified as being able to reduce energy costs in their new or renovated facilities.

The deduction allows building owners to claim a deduction of up to $1.80 per square foot for buildings that save at least 50% of the heating and cooling energy of a building that meets ASHRAE Standard 90.1-2001.

Partial deductions of up to $.60 per square foot can be taken for measures affecting the building envelope, lighting, or heating and cooling systems. These deductions are available for systems “placed in service” from Jan. 1, 2006, through Dec. 31, 2013 (go to www1.eere.energy.gov/buildings/tax_commercial.html for more information).

While deducting the cost of a capital investment such as new lighting is not all that special, the CBD goes one step further in that the owner can potentially write off the entire cost of the new lighting in the tax year in which it is placed in service, as opposed to it being capitalized and depreciated or amortized over time. This means that a cost item can now be claimed in a single tax year.

It’s also worth noting that the Interim Lighting Rule, which was supposed to be in effect only until the partial deduction rules were written, is still in effect. The rule enables commercial building owners to deduct the full cost of new interior lighting, capped at $.30 to $.60, on a sliding scale based on lighting power density reductions beyond ASHRAE/IESNA 90.1-2001 standard.

Additionally, the legislation creates new credits for combined heat- and power-system property, small wind-energy property and geothermal heat-pump systems through 2016.

Other provisions include:

  • Extension of the Renewable Energy Production Credit (for wind to 2010 and for solar, biomass, geothermal and hydro to 2011); and

  • Extension of credits for solar energy property, fuel-cell property and microturbines through 2016. The bill increases the $500 per half kilowatt of capacity cap for qualified fuel cells to $1,500 per half kilowatt of capacity, and adds small commercial wind as a category of qualified investment. The bill also provides a new 10% investment tax credit for combined heat and power systems and geothermal heat pumps. The bill allows these credits to be used to offset the alternative minimum tax.