179D Tax Deduction Extended To End Of 2016

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On Dec. 18, 2015, President Obama signed a tax bill that includes a two-year extension of Section 179D of the tax code, known as the Commercial Buildings Tax Deduction (CBTD), to Dec. 31, 2016. It also raises the bar on energy efficiency, making the deduction more difficult to earn.

The CBTD was created by the Energy Policy Act of 2005 and offers an accelerated tax deduction as an incentive for commercial building owners to invest in energy-efficient upgrades. It was set to expire at the end of 2013. In December 2014, the president signed a tax bill retroactively extending it to the end of 2014, which meant qualifying projects completed in 2014 could claim the deduction. The new tax legislation passed in December 2015 allows qualifying projects completed in 2015 to claim the deduction, while offering opportunities for new projects in 2016.

Projects placed in service before Jan. 1, 2016 qualify if they achieve target energy efficiency levels using the 2001 version of the ASHRAE/IES 90.1 energy standard as a baseline. The new tax law raises the bar for projects placed in service after Dec. 31, 2015, to the 2007 version of 90.1. This will make achieving the necessary energy efficiency levels to qualify for the CBTD more difficult.

The CBTD provides an accelerated tax deduction up to $1.80/sq.ft. to cover the cost of energy-efficient building interior lighting, HVAC/hot water, and building envelope. Alternately, up to $.60/sq.ft. can be claimed for installing any one of these three systems. Applicable primarily to new construction and renovation, both paths require energy modeling that compares the energy performance of the proposed building against a baseline reference building.

The “Interim Lighting Rule” offers a third, relatively simpler path applicable solely to interior lighting. Well suited to retrofit projects, it allows building owners to deduct the cost of new interior lighting, capped at $.30/sq.ft. to $.60/sq.ft. on a sliding scale, if the new lighting achieves a lighting power density (LPD, measured in W/sq.ft.) that is 25% to 40% lower than the maximum values published in the applicable version of ASHRAE/IES 90.1 (2001 for lighting placed in service prior to 2016, or 2007 for lighting placed in service after 2015). Warehouses are an exception; the new interior lighting must reduce LPD by at least 50% to qualify for a $0.60/sq.ft. deduction.

The other conditions of the “Interim Lighting Rule” remain unchanged. If the project triggers the control provisions of the applicable version of ASHRAE/IES 90.1, those provisions must be complied with. Additionally, bilevel switching must be installed in all occupied spaces except hotel and motel guest rooms, storage rooms, restrooms, public lobbies, and garages. And the application must satisfy the minimum calculated light-level requirements as published in the ninth edition of the IES Lighting Handbook.

The extension of 179D provides financial incentive to commercial building owners to invest in energy-efficient building systems in 2016, although it’s now more difficult to qualify for it. For more information, read the applicable Energy Policy Act section and later IRS notifications or consult a tax expert.

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