As an owner of a commercial building, you’re likely aware of the substantial benefits of green building initiatives, from both an environmental and economic standpoint. In the long term, green building simply makes sense – to conserve our natural resources and reduce energy usage that controls utility bill spikes.
In the short term, however, you may find it difficult to allot a portion of your budget for the upfront expense of green building construction. You are not alone. The expense of a sustainable building prevents many businesses from breaking ground on a project.What many commercial building owners don’t know is that there are tax credits and incentives on the federal, state and local levels designed to help fund green building initiatives. In fact, as our government realizes the necessity to incentivize commercial businesses in order to go green, the more legislation is passed to establish green building tax breaks.
Below are the top (and most overlooked) three tax incentives that are currently helping commercial businesses like yours fund their green building construction projects:
1. The Internal Revenue Code Section 45L Tax Credit
The energy efficient new homes tax credit (Section 45L of the Internal Revenue Code) applies to single family and multi-family dwelling units (three stories or less) that were sold or leased between January 1, 2011 and December 31, 2013. Specifically, if any of these dwellings exceeded the 2006 Edition of the International Energy Conservation Code (IECC) heating and cooling budgets by 50%, they are eligible for a $2,000 green building tax credit.
For example, a building with 60 units could generate a Section 45L tax credit of $120,000.
Given that current energy codes have evolved tremendously over the past five years, many developers are already building to specifications that would meet energy-saving standards for this tax credit. For that reason alone, all apartment buildings and residential condominium developments completed within the last four years are worth assessing for potential 45L credits.
Also note, California does not use the national model energy code. Instead, the CEC (California Energy Commission) has been adopting its “California-only” energy code for over three decades.
The CEC’s energy code (Title 24, Part 6) is significantly more stringent than the national code, which therefore makes the Section 45L tax credit very accessible to California builders. Eligible construction also includes substantial reconstruction and rehabilitation. Builders and developers are able claim this tax credit retroactively for up to three years (2011, 2012 and 2013).
2. The Section 179D Deduction
The Emergency Economic Stabilization Act of 2008 extended the energy efficient commercial buildings 179D deduction through December 31, 2013. This legislation offers a tax deduction of up to $1.80/square foot to those commercial building owners who invested in green building improvements that were placed in service after August 8, 2005.
Eligible green building improvements for the 179D deduction must reduce energy usage for any of the following categories:
- Building envelope
- Interior lighting systems
Unlike most deductions, which are based on the amount spent, the 179D deduction is primarily based on affected square footages. Ideal candidates generally have green building improvements with a square footage of at least 50,000 square feet. A wide range of improvements, from simple lighting retrofits to full-scale construction projects, qualify for this timely tax break.
Architects are also eligible to receive the 179D deduction of $1.80/square foot for any government green building they design, even though they have no basis in the property.
3. Section 48 Investment Tax Credit
The Section 48 Investment Tax Credit (ITC) allows project owners or investors to be eligible for federal business energy investment tax credits for installing designated renewable energy generation equipment placed in service during the period 2006 through 2016.
Section 48 provides an investment tax credit consisting of the "energy percentage" times the basis of energy property placed in service during the taxable year. Qualifying renewable energy projects are able to take advantage of investment-based tax credits up to 30% of eligible costs.
Businesses that find the Section 48 tax credit beneficial are often able to use a cost segregation study to increase the allocation towards property eligible for these credits while accelerating depreciation on other assets.
The best way to know if your commercial building’s green building efforts are eligible for these tax credits and incentives is to seek the guidance of a tax expert with experience in green building tax incentives.
With the right guidance, you’re ensured a streamlined process for identifying the tax credits you deserve to maximize your tax savings.