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Energy-Efficient Tax Incentives for Commercial Buildings

At a Glance

Main Takeaway

Savvy business owners should consider energy-efficient incentives for additional tax savings. Energy-efficient incentives enable property owners to immediately deduct the cost of a building when installing qualified energy-efficient systems in their spaces.

Next Step 

Tenants may also qualify if they have construction expenses. Contact Windes to determine if your company is eligible for these tax incentives and other cost-saving strategies.


Deductions for Commercial Buildings

Section 179D of the Internal Revenue Code permits deductions for commercial building owners. This benefit was first available in 2006 and was made permanent through the Consolidated Appropriations Act of 2021. The deduction can be a powerful tax benefit to the right taxpayer, converting the cost of a commercial building from an asset depreciable over 39 years to an immediately deductible cost.

Eligibility Criteria

Owners of buildings used primarily for commercial purposes are eligible for this deduction. It also applies to other facilities, such as single-family homes, if converted into primary commercial spaces and industrial buildings. Tenants may also be eligible for this deduction if they have improvement or construction expenditures.

What Can Be Deducted?

Owners of existing and new buildings who install specific energy-saving systems can receive a deduction of up to $1.88 per square foot for the 2022 tax year. The amount is adjusted annually for inflation. This includes:

  • interior lights;
  • a building envelope to better separate the conditioned and unconditioned parts of the facility; or
  • any hot water, cooling, heating, or ventilation systems that reduce energy consumption or cost of HVAC, lighting, or hot water systems by 50% or more than the building’s minimum requirements.

Your deduction is based on the qualifying improvements to your commercial building. Owners who upgrade every available energy-saving system and meet the 50% savings requirements are considered fully qualifying. They can expect to receive a deduction of $1.88 per square foot.

If you implement changes only to some systems or do not meet the savings requirements for all three, your building is partially qualified. In this event, your tax credit is determined by the systems that meet eligibility. For example, reducing your energy costs by 15% or more by upgrading your HVAC or hot water can qualify for a deduction of $0.63 per square foot for the 2022 tax year.

You may also qualify for the interim lighting rule, which qualifies for a deduction of $0.63 per square foot for reductions of 25% or more of lighting power density. Warehouses must reach a 50% reduction to be eligible for this deduction.

Deductions taken under IRC §179D reduce the cost basis of the property that can be depreciated. The incentive allows a portion of the cost basis to be deducted immediately, compared to depreciated over the property’s useful life, which can be as long as 39 years for a commercial building.

How to Qualify for the Deduction

Businesses must calculate their energy costs and savings using Department of Energy (DOE) approved computer software to claim this tax credit. The IRS also provides guidance on these deductions for commercial building owners.

The eligibility rules and calculations for this tax credit are complex, and having the assistance of outside real estate accounting services can make the process easier. These professionals will help you understand if you qualify for any deduction and assess your business to find other energy rebates or credits to minimize your building costs and taxes.

Additional Ways for Businesses to Save

Applying these cost-effective energy measures will help your company save money, whether or not you qualify for commercial building energy-efficient deductions.

Benchmark Your Building

Benchmarking allows your business to measure and compare its energy to past consumption, similar buildings, and reference point levels. It can help identify areas of underperformance to target for improvements. Having benchmarks also lets you verify that your energy-saving reductions are effective.

Partner with Experts

The Environmental Protection Agency (EPA) and Energy Star’s service and product providers (SPP) team can partner with your business to find energy concerns, prioritize issues, and implement energy-saving projects. You can cut your energy costs while lowering emissions by working with an SPP near you.

Implement an Energy Management Program

Use EPA guidelines to plan and operate your company’s energy management program. You will learn how to assess your energy program, set goals, and create an action plan through this step-by-step guide. This plan also teaches you to evaluate your business’ progress and recognize energy achievements.

Finance Your Energy-Efficient Projects

If your company wants to upgrade energy efficiency but does not have the cash available, financing the project is an option. Energy-efficient projects are considered low-risk investments, meaning lenders are open to offering favorable terms. Many utility companies, state and federal governmental agencies, and nonprofits offer rebates, grants, or loans for energy-efficient projects.

Use Low- and No-Cost Approaches

Consider the most affordable options to cut energy costs first. Taking these steps can help your business save for more expensive efficiency projects.

  • Increase lighting efficiency: if your building uses incandescent or halogen lighting, upgrade to newer fluorescent or LED source for your fixtures.
  • Purchase Energy Star products: look for printers, computers, and break room appliances with excellent Energy Star ratings since these products have lower annual operating costs.
  • Follow energy-efficient best practices: follow proper maintenance and operation procedures to extend the life of work equipment and building infrastructure.
  • Develop an energy-saving checklist: include low-cost or complimentary items and list specific actions that are easy for your company to apply and offer a quick return on investment.
  • Stage your upgrades: instead of carrying out all significant improvements at once, complete projects one at a time and let the savings it brings help cover future upgrades.
  • Increase company sustainability: finding better ways to manage and reduce your waste and water use cuts your expenses, helping you afford energy-efficient solutions.
  • Start energy-saving competitions: encourage your employees to save energy through fun competitions and rewards.

Find Tax Savings with Windes

If your company has made energy-efficient improvements, you may qualify for tax incentives. An accounting and consulting firm like Windes can determine your eligibility and identify cost-savings opportunities.

Our accounting professionals can help put your business in a position to take advantage of available energy-related tax incentives. We offer tax return preparation and filing services and have the expertise needed for companies that operate in multiple states.

Contact our Long Beach, Los Angeles, or Orange County business accountants today to learn how we can assist you.

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