Energy Incentive Programs: Good for the Earth and the Bottom Line

Bruce A. Johnson, MBA, CEM
Published Date:
Mar 1, 2017

These days, people talk a lot about “going green.” Companies promote environmentally conscious programs and policies to win new customers, improve public image, and reduce costs. Indeed, energy incentive programs may confer tremendous tax savings. There are a number of programs at both the federal and state levels that allow commercial real estate owners to increase their cash flow while decreasing their carbon footprint. 

The federal government has four major initiatives available to the environmentally conscious property owner. The star of the show is a powerful deduction benefit colloquially referred to as “EPAct 179D,” or simply “179D.” The Energy-Efficient Commercial Buildings Tax Deduction (IRC section 179D, enacted by Section 1331 of the Energy Policy Act of 2005), incentivizes energy-efficient construction for newly constructed and recently renovated commercial buildings. EPAct 179D allows taxpayers to accelerate depreciation of qualified energy-efficient commercial building property placed in service after Dec. 31, 2005 and before Jan.1, 2017. This is a one-time deduction benefit, and while it is best claimed in the year of construction, it can be claimed retroactively using a 3115 Change in Accounting Method. 

A 179D deduction of up to $1.80 per square foot is available for the cost of developing energy-efficient property. This is achieved by qualifying for a deduction of up to $0.60 per square foot in three key areas: interior lighting, HVAC, and building envelope. The deduction is based on total building square footage but cannot exceed the cost of the energy-efficient improvements. Clearly, the best candidates are the largest candidates, and properties like hotels, retail facilities, warehouses, trucking terminals, and industrial facilities are all excellent choices. 

In order to claim a 179D deduction, a taxpayer must be able to document the reduction in energy consumption generated by the improvements. Reduction in consumption is compared to a set benchmark determined by the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE). Projects completed prior to Dec. 31, 2015 must be able to demonstrate at least a 50% improvement in efficiency in comparison to ASHRAE Standard 90.1-2004. Projects completed after Jan. 1, 2016 are compared to a slightly higher standard, ASHRAE Standard 90.1-2007. Improvements in interior lighting are the easiest to document—a simple spreadsheet enough to do the trick. Often, retrofits involving LED lighting are efficient enough to qualify for the 179D deduction on their own. Taxpayers who also wish to document improvements in HVAC or building envelope will need to submit a more thorough document, however, including building modeling using software approved by the Department of Energy. Buildings that qualify for the 179D deduction must be inspected and certified by a professional contractor or engineer who is based in the same jurisdiction as the property. The third-party inspector must be completely independent of the property owner, with no personal interest in any potential tax savings that may result.

Many people don’t realize that the 179D deduction can also be claimed on tax-exempt entities. When schools, municipalities, and governments implement qualified improvements, the deduction may be claimed by the primary designer, architect, or engineer. This is a tremendous windfall for a designer. First, buildings of this nature tend to be quite large, resulting in a larger deduction. Second, whereas a property owner would have to reduce his basis by the amount of the credit, the designer has to do no such thing: The asset isn’t on his books at all, so there’s nothing to reduce. The designer gets all the benefit of the deduction, with none of the drawbacks of basis reduction. 

45L, the next federal energy incentive up for discussion, is like 179D’s little brother.  It’s not quite as powerful, and it’s a bit different, but it’s still a good guy to have around. The 45L tax credit offers a one-time $2,000 credit per residential unit to eligible developers of energy-efficient residential dwellings. The credit is available for properties constructed prior to Dec. 31, 2016 and may apply to townhomes, condos, single-family homes, and apartment buildings no more than three stories above grade. In order for the tax credit to be claimed, a third-party expert must test each dwelling unit to verify a 50% reduction in energy consumption in relation to the benchmark set by the 2004 International Energy Conservation Code (a different metric than 179D’s ASHRAE). Just because one residential unit meets the criteria and earns the credit does not mean that all units in a property will do the same—a sampling of units is not sufficient to draw a conclusion and earn the 45L credit. Credits can be earned on newly constructed or rehabilitated property, but they may be difficult to claim retroactively due to logistical challenges in quantifying costs of materials. 

Solar power—perhaps the ultimate renewable energy source—has also been incentivized by a federal program since 2005. (Many states have complementary programs as well.) This one-time tax credit applies to photovoltaics and solar heating systems. The incentive offers a 30% credit on project costs in the year the system was placed in service. There is no “look-back” option and no benefit in future—the incentive must be taken in the year the system was placed in service. Taxpayers must have a tax liability to take the credit, which is claimed via Form 3468. The size of the credit will begin to decrease in 2020, and it is expected to expire on Dec. 31, 2021. For the moment, however, this incentive may confer a sizable benefit, especially since solar systems are classified as short-lived MACRS five-year life and may be eligible for significant bonus depreciation under the PATH Act. 

Energy Star, another federal tax credit program, applies mainly to residential properties and offers credits that may range from 10-30% of project cost. Some caps do apply, but the program offers incentives on a tremendous range of building assets: insulation, lighting, appliances, windows, doors, solar systems, and much more. Visit for a better look at this incentive and the broad scope of assets to which it applies. 

The programs discussed until now are federally administered. Many states, however, have their own programs, and New York has a really powerful slate of incentives. The New York State Energy Research and Development Authority (NYSERDA) has been helping New Yorkers increase energy efficiency, save money, use renewable energy, and reduce reliance on fossil fuels since 1975. They administer funding and load management programs while performing research and educating partners as to the economic benefits of clean energy. Funds are collected via state utilities under the statewide systems benefits charge. NYSERDA works with residential, commercial, and non-profit partners. 

New York City has also instituted an energy-benchmarking program. Property owners must annually release utility consumption data to the public, for better or for worse. This transparency regarding energy consumption encourages energy efficiency, if only for the sake of good publicity. There is no official incentive attached to this benchmarking, but buildings that prove themselves energy-efficient generally have higher rents, resale values, and occupancy rates. 

Energy incentive programs can be a very significant part of an overall tax strategy.  Being mindful of the triple bottom line—people, planet, profit—is more important than ever.   Property owners and their CPAs are urged to explore these powerful initiatives.

JohnsonBruce A. Johnson, MBA, CEM, is a partner at Capstan Tax Strategies in Jenkintown, PA.  He  works closely with commercial real estate owners, investors, and accounting firms to provide practical, creative, and client-specific engineering-based tax solutions. He has a particular interest in energy-efficient building incentives and sustainability, and he has earned the Association of Energy Engineers’ CEM credential. Bruce has been a featured presenter at the Association of Energy Engineers’ annual Globalcon events, where he has highlighted Capstan’s ability to blend savings with sustainability. Bruce is a senior member of the American Society of Cost Segregation Professionals (ASCSP). He is a member of the Association of Energy Engineers (AEE), the Delaware Valley Green Building Council, and the International Council of Shopping Centers (ICSC), where he served as a faculty member at ICSC University, School of Finance, Accounting, and Lease Administration. Bruce is also a board member of the National Association of Industrial and Office Parks (NAIOP), where he is head of the governance committee as well as part of the national tax and finance subcommittee. He can be reached at or (215) 885-7510.

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