Making your commercial property more energy-efficient doesn’t just help the planet—it can also help your bottom line. Thanks to the tax deduction for energy-efficient commercial buildings, eligible property owners can recover costs and invest further in sustainable operations. But how precisely do you go about claiming this valuable incentive? Here’s a straightforward guide to help you traverse the process with confidence.
Understanding the Basics of Deduction
The energy-efficient commercial buildings deduction is authorized under Section 179D. It allows qualifying building owners or designers to deduct the costs of energy-efficient improvements made to lighting, HVAC systems, or the building envelope. This deduction can result in significant tax savings, especially when applied to large-scale projects.
Qualified properties include commercial buildings and adequate residential structures at least four stories high. Designers of public buildings, such as architects or engineers, can also benefit from designing qualifying energy-saving systems.
To qualify, the building must reduce total annual energy and power costs compared to a benchmark standard. Third-party certification from a qualified engineer or contractor is required to prove compliance.
Steps to Claim the Deduction
The first step is to complete qualifying improvements. In case you’re retrofitting an older facility or constructing a new one, the improvements must meet the energy reduction thresholds. This includes improvements to interior lighting systems, HVAC systems, or the building envelope (such as insulation and windows).
Next, an independent certification must be performed. This assessment verifies that the installed systems meet or exceed the required energy savings criteria. The evaluation must be performed by a qualified individual using approved software and testing procedures.
Once certified, building owners must work with their tax advisor to file the necessary documentation and claim the deduction on their federal income tax return. If the deduction is being claimed by a designer for a public building, it must be properly documented by IRS guidelines, including a written allocation from the building’s government owner. It’s worth noting that the tax deduction for energy-efficient commercial buildings can be claimed in addition to other credits or depreciation allowances, making it a key component in a broader tax strategy.
Common Pitfalls and How to Avoid Them
One of the most common mistakes in claiming this deduction is failing to obtain the required third-party certification. Without proper documentation, the IRS may disallow the deduction even if the building meets the energy efficiency benchmarks.
Another issue is incorrectly determining eligibility, particularly for designers working on public projects. The IRS has specific rules about who qualifies as a designer and what constitutes a public building. Ensuring that roles, responsibilities, and relationships are properly documented is essential.
Additionally, business owners sometimes miss out because they’re unaware that past projects may still qualify. In some cases, retroactive claims can be made for work completed in previous years. A qualified tax advisor can help evaluate opportunities for amended returns and recover missed deductions.
Let Us Help You Maximize Your Benefits
At Prince CPA Group, we understand that navigating energy tax deductions can be challenging and nuanced. That’s why we work closely with property owners, developers, and designers to make sure that every qualifying opportunity is claimed correctly and completely. If you’re considering an upgrade or looking to claim the energy-efficient commercial buildings deduction for a past project, let us guide you through every step.
Contact us today to maximize the value of your sustainable investments.