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IRS Modifies Energy Savings Percentages for Energy-Efficient Building Improvements

Tax

By Ron Kramer

On February 23, 2012, the Internal Revenue Service (IRS) issued Notice 2012-22, Modification of Notice 2008-40; Deduction for Energy Efficient Buildings. This notice provides an additional set of energy savings percentages that taxpayers may use to qualify for the partial deduction for energy efficient buildings.

Background

Internal Revenue Code (IRC) Section 179D(a) allows a deduction to a taxpayer for part or all of the cost of energy efficient commercial building property that the taxpayer places in service. IRC Section 179D(c)(1) defines “energy efficient commercial building property” as depreciable property that satisfies each of the following conditions: (1) the property is installed on or in any building that is located in the United States and is within the scope of Standard 90.1-2001; (2) the property is installed as part of the interior lighting systems; the heating, cooling, ventilation, and hot water systems; or the building envelope; and (3) it is certified that the interior lighting systems, heating, cooling, ventilation, and hot water systems, and the building envelope that have been incorporated into the building, or that the taxpayer plans to incorporate into the building subsequent to the installation of such property, will reduce the total annual energy and power costs with respect to the 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.

IRC Section 179D(b) provides that the maximum amount of the Section 179D deduction shall not exceed the excess (if any) of (i) the product of $1.80 and the square footage of the building, over (ii) the aggregate amount of the Section 179D deductions allowed with respect to the building for all prior taxable years.
In the event that the installation of energy efficient commercial building property does not achieve the 50-percent reduction in total annual energy and power costs required by IRC Section 179D(c)(1)(D), IRC Section 179D(d)(1) provides for a partial deduction, in an amount not to exceed the product of $0.60 and the square footage of the building, for each system that satisfies the requirements IRC Section 179D(d)(1) (known as the permanent rule).

A taxpayer may claim a partial Section 179D deduction for each system; however, the taxpayer may not claim partial deductions that in total exceed the overall limitation of (i) the product of $1.80 and the square footage of the building, over (ii) the aggregate amount of the Section 179D deductions allowed with respect to the building for all prior taxable years.
In addition, IRC Section 179D(f) provides an interim lighting rule, which is an alternate method of calculating a partial deduction for interior lighting systems. This rule provides a partial deduction for part or all of the cost of certain energy efficient commercial building property installed as part of a lighting system that reduces the lighting power density of the building by more than 25 percent (50 percent in the case of a warehouse).

Modification of Notice 2008-40

On April 7, 2008, the IRS published Notice 2008-40, which provided alternative energy savings percentages that taxpayers could use to qualify for the partial deduction under the permanent rule discussed above. The energy savings percentages provided in Notice 2008-40 are 10 percent for the building envelope and 20 percent for interior lighting systems and heating, cooling, ventilation, and hot water systems. IRS Notice 2012-22 provides an additional set of energy savings percentages that taxpayers may use to qualify for the partial deduction for energy efficient buildings under the permanent rule.

Until December 31, 2013, taxpayers may use either the energy savings percentages provided in section 7.01 of Notice 2008-40 or the substitute energy savings percentages provided under Notice 2012-22.

The energy savings percentages permitted under Notice 2012-22 are available for property placed in service on or after the March 12, 2012 effective date of the notice. If IRC Section 179D is extended beyond December 31, 2013, the IRS and the Treasury Department expect, in the absence of other changes to IRC Section 179D, that the substitute energy savings percentages set forth in Notice 2012-22 will be the only energy savings percentages used in determining whether property placed in service after December 31, 2013, is partially qualifying property.

The following table summarizes the energy savings percentages permitted under Notice 2006-52, Notice 2008-40 and Notice 2012-22.

Summary of Energy Savings Percentages Provided by IRS Guidance

Effective for property placed in service January 1, 2006 - December 31,2008 January 1, 2006 - December 31, 2013 Effective date of Notice 2012-22 - December 31, 2013; if §179D is extended beyond December 31, 2013, also effective (except as otherwise provided in an amendment of § 179D or the guidance thereunder) during the period of the extension

Effect of Notice 2012-22
Based on the new percentages, lighting systems will have to save more energy to qualify for the partial deduction, but HVAC systems will have to save less to meet the standards. As noted, until December 31, 2013, taxpayers may use either the energy savings percentages provided in section 7.01 of Notice 2008-40 or the substitute energy savings percentages provided under Notice 2012-22. Use the percentages that would maximize the deduction for the energy efficiency expenditures.

If you have recently constructed or renovated a building or facility, Schneider Downs can assist you with a study to determine whether you would benefit from the energy efficiency tax deduction.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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