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Section 179D Energy Cost Deduction

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Tax Incentives For Commercial Energy Retrofits

Posted: 02 Jan 2011 10:40 AM PST

Businesses looking to lower the costs of making energy efficiency improvements may be able to qualify for certain tax incentives and deductions. The energy efficient commercial building deduction under IRC § 179D allows a taxpayer to deduct the cost of certain energy efficient improvements placed in service before January 1, 2014. This commercial energy deduction, originally created by the Energy Policy Act of 2005, and since extended by the Emergency Economic Stabilization Act of 2008, allows an immediate deduction to certain component costs on depreciable property installed for the improvements to the (1) interior lighting systems, (2) heating, cooling, ventilation, and hot water systems, or (3) building envelope. These qualified improvements offer a maximum deduction of $1.80 per square foot of the building, less the aggregate amount deducted in any prior tax year. In addition, any deduction allowed under IRC § 179D reduces the depreciable basis of the property. Thus, the larger the building, the greater the potential deduction allowed. To qualify for these deductions, certain commercial building standards must be met under ASHRAE 90.1-2001, as well as other limitations under the code section.

Buildings that can reduce 50 percent or more of projected annual energy costs across all three components are eligible for the maximum $1.80 per square foot deduction. Buildings that cannot meet the 50 percent energy savings costs across all three components are eligible for a partial deduction of up to $0.60 per square foot. In this case, each component must individually save more than 16 2/3 percent of total energy costs.

Generally, the owner or tenant of the building is eligible for the deduction, but in the case of public government-owned buildings, such as courts, schools, or military facilities, etc., the designer or contractor may be eligible for the energy tax deduction.

Before claiming the deduction, the taxpayer must obtain a certification by a “qualified individual,” such as an engineer or contractor, that the required energy savings will be achieved. Any calculation in determining the amount of reduced energy savings for qualifications of the energy tax deduction must be prepared using qualified computer software. The Department of Energy Maintains an online list of supported software vendors at http://www1.eere.energy.gov/buildings/qualified_software.html.

Business owners are also eligible for several advanced energy project credits which are worth up to 30 percent of a taxpayer’s qualified investment in renewable energy projects which meet specific guidelines set forth by the American Recovery and Reinvestment Act of 2009 (IRC § 48C). A qualifying advanced energy project is an investment project which re-equips, expands, or establishes a manufacturing facility for the production of property designed to produce energy from solar, wind, or geothermal sources. Each renewable energy system must meet performance requirements set forth by the Treasury Secretary. Like the commercial building deductions, the advanced energy project credits have specific qualifications and certifications which must be met in order to earn the credits.