The Energy Policy Act of 2005 (EPACT) added section 179D to the Internal Revenue Code. Section 179D permits a deduction for the costs of installing certain energy efficient building systems in commercial buildings. This was extended beyond 2008 for another 5 years by President Bush on October 3, 2008 with the Historic Financial Rescue Bill HR 1424, which also included the Tax Extenders and Alternative Minimum Tax Relief Act.

The deduction applies for both new and previously existing properties and is applicable for the year in which the energy-saving property was made ready for its intended use.

The owner of the building can claim the deduction but most importantly a special rule exists for Energy Efficient property installed in commercial buildings owned by a federal, state or local government entity.

The rule is that the deduction is allocable to the designers of the technical specifications of the energy efficient property. A designer is a person that creates the technical specifications for installation of energy efficient property and may include architects, engineers, contractors, environmental consultants or energy services providers.

Persons who perform installations, repairs, or maintenance of the property are not qualified to receive the deduction allocations.

Many architects, engineers, contractors, environmental consultants and energy services providers are not taking advantage of this potentially large tax deduction. Most are unaware that they are eligible for the deduction, in addition, if they were aware, as with many tax incentives, there is lots of red tape involved.

Here is some of what's involved:
• Certification of the building as an energy efficient building meeting standards set forth must be performed by a licensed engineer or contractor who is properly licensed in the jurisdiction where the building is located.

• The engineer or contractor cannot be related to the taxpayer claiming deduction and has represented in writing to the taxpayer that he or she has the qualifications to provide the certification required or to perform the inspection and testing described.

• Certification Letter satisfies section 179D if it contains the following: Name, address, and telephone # of the qualified individual; Address of the building to which the certification applies; Statement by qualified individual that the amount of reduction was determined under the Rules of Notice 2006-52; Statement that the field inspections of the building performed by a qualified individual after the property has been placed in service have confirmed that the building has met, or will meet the energy-saving targets contained in the design plans and specifications and that the field inspections were performed in accordance with any inspection and testing procedures prescribed by the National Renewable Energy Laboratory (NREL) as Energy Savings Modeling and Inspection Guidelines for Commercial Building Federal Tax Deductions AND are in effect at the time the certification is given.

• Qualifying Statement for example; The interior lighting systems, heating, cooling, ventilation and hot water systems and building envelope that have been, or are planned to be incorporated into the building will reduce the total annual energy and power costs with
respect to combined usage of the building's heating, cooling, ventilation, hot water, and interior lighting systems by 50 percent or more as compared to a Reference Building that meets the minimum requirements of Standard 90.1-2001. (For a 50% qualified building).

• Statement that the building owner has received an explanation of the energy efficiency features of the building and its projected annual energy costs.

• Declaration, applicable to the certification and any accompanying documents: "Under penalties of perjury, I declare that I have examined this certification, including accompanying documents, and to the best of my knowledge and belief, the facts presented in support of this certification are true, correct, and complete."

• List which IDs the components of the interior lighting systems, heating, cooling, ventilation, hot water systems, and building envelope installed on or in the building, the energy efficiency features of the building and its projected annual energy costs.

• Statement that qualified computer software was used to calculate energy and power consumption and costs and identification of the qualified computer software used.

• Statute requires that certain approved software programs must be used in identifying energy expenditures for the purposes of the deduction. A public list of allowable software is viewable at the DOE's web site: http://www1.eere.energy.gov/buildings/qualified_software.html

• And the list goes on.....

I'm sure you're wondering if this is such a hassle why should I even bother? The reason is the substantial tax benefits. For a fully qualified building, the deduction is a maximum of $1.80 per square foot, less the aggregate amount of Section 179D deductions allowed for the building for all prior taxable years.

Partial qualification is allowed as well and the maximum allowable deduction available in this case is $0.60 per square foot, less the aggregate amount of Section 179D deductions allowed with respect to the building for all prior taxable years.

Example
•A 100,000 square foot building could have a maximum deduction of $180,000 at $1.80 per square foot
•At a marginal tax rate of 35 percent, the tax savings would be $63,000 As you can see, there is substantial benefit. The benefit is based on work you are doing or have done. The deduction is taken in the year the work was completed but you can go back 3 open tax years. That means, for example, if you completed work on a facility back in 2008, you can amend your 2008 returns and take advantage of the incentive.

If you believe you may have completed some work or in the process of completing a project that may qualify, how can you or your firm take advantage of this incentive? The answer is to outsource the task to a qualified consulting firm. Their certified engineering professionals can help you determine if you can take advantage of this great tax incentive and if so, maximize your deductions. Find a firm that offers a cost free analysis to determine if your project qualifies and if your firm can take advantage of the tax incentive.

About the Authors:
The authors are Karim Solanji, Director and Mark Lauber, VP of Marketing both of Paradigm Partners. Paradigm Partners is a national tax consulting firm specializing in niche tax services such as the R&D Tax Credit, the IC-DISC (U.S. Exporters' Tax Incentive), WOTC (Federal and State Hiring Tax Incentives), Section 179 and Cost Segregation. Mark's email is This e-mail address is being protected from spambots. You need JavaScript enabled to view it and his phone number is (281) 558-7100 X-105. Our website is www.ParadigmLP.com.