These days, we all have plenty of seasons for going green. We want to live in a healthy environment and leave the world better for our children and generations to come. We feel the social and professional pressures from colleagues and environmentally conscious customers and clients. And we’ve realized that, in many cases, going green means saving green.
When most of us think about the financial benefits of going green, we consider the operating costs of our homes and businesses. We lower energy costs, reduce waste, and minimize travel costs. However, we often overlook the financial incentives of energy efficiency available through tax savings. Two sections of the IRS tax code — 45L and 179D — offer substantial credits and deductions that can help people “double down” on the savings that go along with reducing their professional and personal carbon footprint. Familiarizing yourself with these sections of the tax code and what they can offer can go a long way toward making your energy efficiencies even more valuable.
Energy-efficient commercial buildings deduction
Section 179D was established as part of the Energy Policy Act of 2005, and deals with commercial and large residential buildings. It looks at three specific parts of a building: the lighting system, the HVAC /hot water systems, and the building’s shell or envelope. The building systems are compared against American Society of Heating, Refrigerating, and Air Conditioning Engineers (or ASHRAE) Standard 90.1-2001, and for buildings that are sufficiently more efficient than the standard, up to $1.80 per square foot worth of deductions are generated, available immediately.
And what’s more, buildings can qualify partially. Let’s say you just installed a new lighting system in your warehouse to save money on your electric bill. Chances are, if the system meets current building codes, it will qualify for some level of deduction. Even if you haven’t updated your HVAC system or your building’s exterior, you could still qualify for up to $0.60 per square foot worth of deductions on this year’s tax return. Do the math — that can add up very quickly.
One particularly exciting aspect of Section 179D is that the deductions can, in the case of government or municipal buildings, be passed onto the architects and designers. Recently, we’ve seen a real uptick of architects taking advantage of this facet of the code. It applies to buildings put in service as far back as 2006, and in some cases, it amounts to free money for work already completed.
Energy-efficient home tax credit
Section 45L works in a similar fashion, but offers a tax credit rather than a deduction, and is strictly for residential buildings (single homes and apartment buildings of three floors or less). It also looks at the various systems within the unit and offers a $2,000 credit for those that qualify. This can mean a small credit for an efficient, single-family house or a very large credit for the owner of a large block of low-rise apartment buildings. The credit applies to each unit within an apartment complex; so 100 efficient apartments could mean a $200,000 credit.
Where Section 45L differs from 179D, other than the type of building concerned and that it is a tax credit rather than a deduction, is where it specifies from which the efficiencies must come. For 45L, a significant portion of the efficiency must come from the building’s shell — it’s not possible to install efficient systems in a poorly insulated building and claim the credit. That’s not to say that it’s difficult to claim — envelopes built to code can be sufficient. It is simply that the two codes draw on different standards and focus on different aspects of the buildings.
Separating myth from reality
I don’t qualify. Far too many building and business owners don’t take advantage of these incentives — not only because they aren’t aware of them, but also because they don’t think they qualify. There’s a popular misconception that these incentives require the same sort of green-building effort that goes into Leadership in Energy and Environment Design (LEED) certifications, and that’s not the case. Qualifying for Section 179D or 45L is often more realistic than people think.
It is too expensive. Many people assume that the cost of certifying buildings as qualifying for either Section 45L or 179D will outstrip the tax benefits. This is, fortunately, far from the truth. While the IRS does require an independent third-party entity to perform the certifications, and the engineering and tax knowledge required to properly certify a building is substantial, the tax benefits often end up being worth many times the fee charged by the third-party certifier.
It really is easy being green
Being as energy-efficient as possible is important for a variety of reasons, both personal and professional. Amid all of these reasons, the tax incentives for efficiency should be on the minds of every building owner, architect, and design professional. Combined with the savings realized from energy-efficient systems and well-insulated buildings, environmentalism can be as much about saving green as it is about being green.
David A. Fabian is a director at MS Consultants, LLC, a subsidiary of The Bonadio Group accounting firm. He is responsible for managing all cost-segregation projects and all engineers and accountants on staff. Contact him at dfabian@costsegs.com