On Friday, December 18, 2015, President Obama signed in to law the Protecting Americans from Tax Hikes (“PATH”) Act of 2015, Public Law No. 114-113. The PATH Act retroactively extended the §179D Energy Efficient Commercial Buildings deduction through the end of 2016. The PATH Act also modified the §179D deduction beginning in 2016. Popularly known as the EPAct §179D deduction, this deduction helps commercial building owners and designers of government-owned properties to build energy-efficient properties.
This deduction applies to building owners who have installed or retrofitted a property with energy-efficient lighting, HVAC and building envelope systems. The designers of government-owned buildings such as public schools, universities, federal and state offices, public libraries and government dormitories (four stories or higher) may also receive the deduction.
To receive the EPAct §179D deduction of up to $1.80 per square foot, a taxpayer must install building systems that reduce the building’s annual energy and power costs by 50 percent or more compared to the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (“ASHRAE”) standard baseline building. US Department of Energy-approved software uses simulations to calculate the reduction in energy and power costs. If a building does not qualify for the full deduction, there are partial deductions available for meeting energy reduction targets for the Lighting system, the HVAC and Service Hot Water system, and the Building Envelope system. The partial deduction is $0.60 per square foot. The energy savings targets are 25 percent for Lighting, 15 percent for HVAC, and 10 percent for the Building Envelope. There is also an Interim Lighting Rule that allows a building to qualify for a partial deduction if the interior lighting power density (watts per square foot of the interior lighting) can be reduced by at least 25 percent when compared to ASHRAE 90.1-2001. The deduction varies from $0.30/square foot to $0.60/square foot as the reduction increases from 25 percent to 40 percent. In addition to the reduction in lighting power density, the building must have certain automatic controls and bi-level switching.
Section 179D changes in 2016
Since the EPAct §179D deduction was first introduced, Congress required the energy modeling software to use the ASHRAE 90.1-2001 as the baseline standard. This standard will continue to apply for buildings placed in service in 2015, but buildings placed in service in 2016 will use an updated standard. The updated standard for 2016 is the ASHRAE 90.1-2007.
The major impact of the updated 90.1-2007 ASHRAE standards will be to the Interim Lighting Rule. The 90.1-2007 standard for interior lighting power density is more stringent than the 90.1-2001 standard. For example, under the old standard, a university was allowed a Lighting Power Density of 1.5 watts per square foot. Under the new standard, the allowed Lighting Power Density will be 1.2 watts per square foot. Another area of impact will be for non-residential buildings of five floors or less that are more than 25,000 square feet and less than 75,000 square feet. The ASHRAE 90.1-2007 baseline HVAC system type for this type of building is different and more efficient compared to the previous standard.
If you have questions about how these changes affect you or your clients, please contact us. SourceHOV|Tax has performed numerous §179D studies across the United States using its streamlined process to certify buildings and increase tax deductions.
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Keywords: cost segregation, PATH Act, Protecting Americans from Tax Hikes Act, Public Law No. 114-113, §179D, EPAct §179D, Section 179D, Imran Syed