Harvesting Tax Benefits of Green Building Incentives: Energy-Efficiency Credits and Deductions Are Sprinkled throughout the Code

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EXECUTIVE SUMMARY

* In the past two years, several federal tax incentives have been extended and expanded for designing and constructing or remodeling energy-efficient buildings, both residential and commercial.

* A deduction of up to $1.80 per square foot is available through 2013 for certain energy efficient features in a commercial building construction or retrofit.

* Homebuilders may claim a credit of $2,000 per certified energy-efficient home they build. This section 45L credit sunsets this year.

* The section 25C residential home improvement credit for installing insulation, new windows and certain heating and cooling and other systems has been increased this year and next, as has the section 25D credit for state-of-the-art residential green energy systems such as solar- and wind-generated power systems.

* The depreciation recovery period for "smart" electrical meters and grid systems has been halved to 10 years.

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In the past two years, several federal tax incentives have been extended and enhanced for designing and constructing energy-efficient buildings, both residential and commercial. Some of these measures should be equally attractive for businesses and individuals looking to remodel existing homes and workplaces to save on energy and, as a bonus, taxes.

Four federal laws enacted since early 2008 contain provisions targeting energy conservation:

* The Economic Stimulus Act of 2008, PL 110-185 (ESA)

* The Housing Assistance Tax Act of 2008, PL 110-289 (HATA)

* The Emergency Economic Stabilization Act of 2008, PL 110-343 (EESA)

* The American Recovery and Reinvestment Act of 2009, PL 111-5 (ARRA)

In addition, many states and local governments have enacted provisions to encourage energy-efficient buildings.

Too often, a flurry of legislative activity can overwhelm taxpayers and their advisers with new provisions. Typically, the taxing authorities need time to develop summaries and guidelines for newly enacted laws. As a result, taxpayers who could benefit from the deductions and credits might not be aware of them, in some cases missing out on substantial savings. Here are five recent federal provisions expanded or extended by the EESA and the ARRA that should be of interest to builders, architects and anyone in the market for a new building or thinking about retrofitting one for energy savings. These are by no means all the tax incentives for energy-efficient building or remodeling even in these two acts. The EESA extended a number of provisions of the landmark Energy Policy Act of 2005. Among the ESA's provisions were those providing for 50% bonus depreciation on equipment and more funding for the low-income home energy assistance program. HATA requires states to consider energy efficiency in low-income housing when allocating available tax credits to those projects.

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ENERGY-EFFICIENT COMMERCIAL BUILDING DEDUCTION

For commercial buildings, IRC [section] 179D provides a deduction of up to $1.80 per square foot for energy-efficient features of the buildings construction or retrofit. The taxpayer must secure an analysis by a qualified person (defined as a professional engineer or contractor licensed in the jurisdiction where the real estate is located) who must use software prescribed by the IRS. This deduction is effectively an acceleration of depreciation deductions that would have otherwise been spread over a 39-year recovery life, and reduces tax basis accordingly.

This incentive was originally enacted as part of the Energy Tax Policy Act of 2005 (PL 109-58), but was largely overlooked by tax advisers because of its original expiration date of Dec. 31, 2007, for buildings placed in service after Dec. 31,2005. It was extended an additional year by the Tax Relief and Health Care Act of 2006 (PL 109 432) and then until the end of 2013 by the EESA. …