Spring 2010 issue of Horizons

mezzanines, intermediate floor tiers and penthouses with 7.5 feet or more of headroom. Certain unconditioned garage space can qualify for the square footage calculation. Under Section 179D, the owner of the building is the taxpayer that qualifies for the energy-efficient tax deduction. Energy-efficient property owned by tax-exempt entities typically will not qualify for a deduction under Section 179D since such property does not qualify for tax depreciation. However, buildings owned by federal, state or local governments may be eligible for a tax deduction. Such buildings can include courthouses, government offices, public schools, and town or city halls. For these government jobs, the deduction is allocated to the person primarily responsible for designing the property rather than the owner. Such persons can include architects, engineers, contractors, consultants or other energy service providers. The designer can take the deduction in the taxable year the property is placed in service, but he/she must have received written proof of allocation from the government entity. It is up to the government entity to decide which party or in which percentages multiple parties will receive the deduction. • Depreciation or amortization is allowable for the property. • Property is installed on or in a building located in the U.S. and within the scope of Standard 90.1-2001 (many municipalities require a more strict code than this 2001 building standard). • Property can be part of a completely new structure or installed as a retrofit or upgrade to an existing structure. • Property should be installed as part of interior lighting systems, heating, cooling, ventilation, hot water systems or the building envelope. Some qualifying guidelines to consider when evaluating energy-efficient building improvements are:

• Property should be certified as being installed as part of a plan designed to reduce by 50 percent the total annual energy and power costs for interior lighting, heating, cooling, ventilation and hot water systems of the building. • If a 50 percent energy cost reduction

is unattainable, then a reduced deduction is available for a minimum 16.66 percent energy cost reduction.

The 16.66 percent cost reduction is based on three main building components: heating, cooling and ventilation; lighting; and the building envelope. Each component is allowed a maximum $0.60 per square foot deduction. The analysis of the amount of the energy and power savings of these three main building components must be done using qualified computer software. The software must meet certain specifications established by the IRS and provide support for energy-efficient features of the property and projected annual energy costs. The Internal Revenue Code also provides incentives for alternative energy projects. These projects generate electricity from alternative energy sources such as solar, biomass and wind. A tax credit of 30 percent of the cost of qualified alternative energy property is available to taxpayers that place the property into service before December 31, 2016. This credit provides a dollar-for-dollar offset of income tax as opposed to a deduction, which reduces taxable income. The credit also can be monetized through a grant program for those taxpayers without a current tax liability, meaning taxpayers with net operating losses can still obtain the benefit of this credit. The credit reduces the depreciable basis in the property by one-half of the credit amount. The electricity generated by these alternative energy systems is typically consumed by the enterprise or sold back to the local utility at retail rates under a net-metering agreement.

27 u spring 2010 issue