Energy-Efficient Commercial Buildings Tax Deduction

Summary

Note: The Taxpayer Certainty and Disaster Tax Relief Act of 2020 reinstated this tax deduction and made it permanent. It also included a new section which allows the deduction to be adjusted annually for inflation. Section 13303 of The Inflation Reduction Act of 2022 (H.R. 5376) further modified the deduction by modifying the value of the deduction, changing the energy efficiency requirements, and establishing a bonus deduction value for projects that meet certain prevailing wage and apprenticeship requirements. The bill also established a mechanism for the tax deduction for buildings owned by tax-exempt entities to be claimed by the person primarily responsible for designing the property. These changes are effective January 1, 2023. 

The federal Energy Policy Act of 2005 established a tax deduction for energy-efficient commercial buildings applicable to qualifying systems and buildings placed in service from January 1, 2006, through December 31, 2007. This deduction was subsequently extended several times, and is now permanent.

A tax deduction is available to owners of qualified commercial buildings and designers of energy efficient commercial building property (EECBP) or energy efficient commercial building retrofit property (EEBRP) installed in buildings owned by specified tax-exempt entities, including certain government entities, Indian tribal governments, Alaska Native Corporations, and other tax-exempt organizations. 

EECBP must be installed on or in a building that is located in the U.S. and within the scope of a specified ASHRAE 90.1 and the Illuminating Engineering Society of North America. Additionally, the property must be installed as part of the interior lighting systems, the heating, cooling, ventilation, and hot water systems, or the building envelope. It also must be certified as being installed as part of a plan to reduce the total annual energy and power costs for the above systems by 25% or more in comparison to a reference building meeting the minimum requirements of ASHRAE 90.1.

For EEBRP projects, a qualified building is a building located in the U.S. and originally placed in service not less than 5 years before the establishment of a qualified retrofit plan for the building.

Base Deduction

For property placed in service in 2023 and after, the deduction for EECBP equals the lesser of the cost of the installed property or a dollar figure determined by the square footage of the building and the calculated energy savings. The dollar figure is $0.50 per square foot for a building with 25% energy savings, plus $0.02 per square foot for each percentage point above 25%, up to a maximum of $1.00 per square foot for a building with 50% energy savings.

Bonus Deduction

Projects that meet the labor requirements detailed in the Inflation Reduction Act and IRS Notice 2022-61 can qualify for a higher deduction equal to $2.50 per square foot for a building with 25% energy savings, plus $0.10 per square foot for each percentage point above 25%, up to a maximum of $5.00 per square foot for a building with 50% energy savings.