Tax Benefits of Going 'Green'

Q Are there any tax benefits for constructing “green” buildings?

A Yes, there are tax benefits for building owners that go “green—that is, either construct new, energy-efficient buildings or retrofit existing buildings with energy-efficient systems, says Washington, D.C., attorney Mark Polston. For example, the federal Energy Policy Act of 2005 (EPAct), which took effect in January 2006, lets building owners claim a one-time tax deduction for making their buildings energy efficient, he says.

In other words, if the improvements to a building's interior cooling, heating, lighting, ventilation, and water systems save at least 50 percent of the building's energy costs compared with prevailing conventional standards, the owner can claim a deduction equal to the cost of energy-efficient property installed during construction, with a maximum deduction of $1.80 per square foot of the building, he explains. A partial deduction of up to 60 cents per square foot of the building is allowed if only certain of the building's systems—but not the entire building—save at least 16^2/3 percent of the building's energy costs.

Owners must meet specific requirements to qualify for the tax deduction, notes Polston. For instance, owners can claim the tax deduction only in the year the building or systems are “placed in service,” or ready for use, he says. And the building or systems must have been placed in service during the period of Jan. 1, 2006, through Dec. 31, 2007, he notes. Plus, the building must meet certain efficiency and performance standards, he adds.

The IRS has issued a Notice called “Deduction for Energy Efficient Commercial Buildings” that you can download from http://www.natptax.com/n2006-52.pdf. The notice is designed to educate owners about meeting those efficiency standards and to offer guidance on how to calculate and verify energy cost savings, notes Polston.

There is also a business energy tax credit for owners that install qualified fuel cells, solar equipment, or stationary microturbine power plants in 2006 and 2007, notes Polston. The owner gets a 30 percent tax credit for the cost of installing qualifying fuel cell power plants, a 30 percent credit for the cost of installing qualifying solar energy equipment, and a 10 percent credit for the cost of installing qualifying stationary microturbine power plants.

The Department of Energy offers information on other federal tax incentives and energy-efficiency programs, says Polston. You can find that information by going to its Energy Efficiency and Renewable Energy Web site at http://www.eere.energy.gov/buildings/info/tax_credit_2006.html.

Also, many states offer tax breaks and other incentives to owners of energy-efficient, commercial buildings, says Polston. For example, North Carolina gives building owners that install equipment or systems using biomass, hydro, solar, or wind technologies a tax credit of up to $2.5 million, he notes.

Some states allow tax deductions and credits for owners that install ENERGY STAR-compliant hot water heaters in their buildings, he adds. Some municipal governments also offer tax incentives, he adds. Check whether the governments of the state and municipality where your building is located will offer you tax incentives for going green.

• Energy Policy Act of 2005: Pub. L. 109-58 (8/8/05).

• Notice: Deduction for Energy Efficient Commercial Buildings, I.R.S. Notice 2006-52 (6/2/06).

CLLI Source

Mark Polston, Esq.: Womble Carlyle Sandridge & Rice, PLLC, 1401 Eye St., N.W., 7th Fl., Washington, DC 20005; (202) 857-4442; MPolston@wcsr.com.