Deductibility of LEED Certification Costs

By Joel Ypma, CPA, Grand Rapids, Mich.

Editor: Frank J. O’Connell Jr., CPA, Esq.

Expenses & Deductions

Leadership in Energy and Environmental Design (LEED) certification is an increasingly popular distinction demonstrating and recognizing building sustainability. It also demonstrates a commitment to “green” principles through the design and construction of a building. The certification is an appealing form of recognition for building owners dedicated to key environmental principles. However, the cost to obtain LEED certification for new or existing building space can vary depending on the size of the project and the level of certification desired. Tax professionals may be in the best position to support their clients or company in identifying these costs and determining the appropriate tax treatment as either a current-period expense or a capital expenditure.

The LEED Green Building rating systems and certification program were developed by the U.S. Green Building Council (USGBC) in 2000 and are currently administered by the Green Building Certification Institute (GBCI). LEED is an internationally recognized standard for green construction and building designs. LEED certification is an effective and established form of environmental action that continues to be popular with dynamic building owners, developers, and construction companies. According to the USGBC website, nearly 9 billion square feet of building space have already been certified, and an additional 1.6 million square feet are certified each day.

LEED certification for new construction and major renovation projects is awarded progressively on the following scale: Certified, Silver, Gold, and Platinum. The various levels of certification represent the degree to which the project was designed and built while incorporating strategies for “achieving high performance in key areas of human and environmental health” including sustainable site development, water savings, energy efficiency, materials selection, and indoor environmental quality.

The intent of this discussion is not to dissect the requirements and intricacies of obtaining LEED certification for a building; however, the certification process can aptly be summarized as administrative- and compliance-driven. Furthermore, the certification must be completed by a LEED-accredited professional.

Building owners that seek LEED certification for their building or project will most likely engage the project’s contractor, architect, or a third-party provider to drive the certification process. The certification process is usually brokered through a professional services agreement between the owner and the provider of the service. As such, the cost to complete the certification process can be determined with some due diligence and a survey of the appropriate invoices. The question then becomes how to correctly treat the LEED certification cost. Should the LEED certification cost be capitalized as an indirect project cost associated with the construction of the building in accordance with Sec. 263A? Does the LEED certification create some sort of intangible asset? Or should the LEED certification cost be classified as a current-period expense under Sec. 162?

Under Temp. Regs. Sec. 1.263(a)-2T(d) and Sec. 263A, a taxpayer must capitalize amounts paid to produce real or personal property. Also, Regs. Sec. 1.263A-1(a)(3)(i)(A) prohibits the deduction of direct and indirect costs to produce real or personal property and requires these costs to be capitalized as well. Direct material and labor costs are defined at Temp. Regs. Sec. 1.263A-1T(e)(2)(i)(A) and Regs. Sec. 1.263A-1(e)(2)(i)(B). They include the materials and labor that are consumed in the course of the production of real property. For new building construction this could include items such as concrete, steel, windows, doors, pipes, and wiring, as well as the labor to put these items in place.

Indirect capital costs are defined at Regs. Sec. 1.263A-1(e)(3)(i) and include all other costs “properly allocable to property produced or property acquired for resale when the costs directly benefit or are incurred by reason of the performance of production or resale activities.” Typical examples of indirect costs pertaining to building construction are architectural and design fees, engineering fees, and municipal permits and fees. These costs directly benefit and are incurred by reason of the performance of the construction of the building. However, is the LEED certification cost considered an indirect cost because it benefits the physical construction activity? Is the cost incurred by reason of the performance of the construction itself (i.e., is this a construction-related cost)?

Key distinctions between LEED certification and the other construction indirect costs outlined above are that the certification is optional and avoidable, and serves no benefit to the outcome or trajectory of the construction activity. For example, if a developer begins a construction project with the intent of obtaining the certification but subsequently changes his or her decision, the LEED certification could be eliminated without issue, and the project would continue intact and otherwise unchanged. This is not the case with permitting, engineering, or design fees. Changes to the scope of any of those items would have an effect on the construction activity being conducted.

Another key distinction is timing. Although it is more cost-effective and efficient to conduct the LEED certification compliance activities during the actual construction phase, especially from a documentation standpoint, there are no promulgated requirements from the GBCI regarding when the certification process must begin or end. In other words, there is no mandate to correlate the certification elements with the production activity. For example, the certification process can begin and end years after the building or project is placed into service.

Another point to consider is whether the expenditures to acquire LEED certification produce a benefit beyond the current tax year or create an intangible asset. A watershed case on this subject is INDOPCO, Inc., 503 U.S. 79 (1992), in which the Supreme Court ruled that certain expenses incurred were not deductible because the costs resulted in a long-term benefit. The decision expanded capitalization requirements and the definition of a separate and distinct asset. The IRS eventually drafted regulations in the aftermath of INDOPCO to better construct the framework in which to require the capitalization of costs for certain intangible assets. The following excerpt from these regulations defines a separate and distinct intangible asset:

The term separate and distinct intangible asset means a property interest of ascertainable and measurable value in money’s worth that is subject to protection under applicable State, Federal or foreign law and the possession and control of which is intrinsically capable of being sold, transferred or pledged (ignoring any restrictions imposed on assignability) separate and apart from a trade or business. [Regs. Sec. 1.263(a)-4(b)(3)(i)]

The central elements of the definition relevant to this discussion involve the words “separate and distinct” and “ascertainable and measurable value.” In a working application, there is not a distinct, ascertainable, marketable value of a LEED certificate independent and apart from the property to which it originally pertained. Whether a LEED-certified or -certifiable building is any more valuable (and to what extent in terms of dollars) is a question for real estate valuation theorists, property appraisers, and assessors. In either case, that is a building/property valuation issue.

Perhaps the most insightful and analogous guidance from the IRS can be found in Rev. Rul. 2000-4. The IRS concluded that the “costs incurred by a taxpayer to obtain, maintain, and renew ISO 9000 certification are deductible as ordinary and necessary business expenses under section 162.” ISO 9000 is a body of standards for quality management and control systems. The standards are set by the International Organization for Standardization. ISO 9000 certification can be sought by any number of companies across a wide array of industries, but it is very common among manufacturing companies. The costs associated with ISO 9000 certification include the internal costs to create, develop, and implement such a system as well as the external costs necessary for a third-party audit of the system and the actual certification fee. Much like LEED certification, ISO 9000 certification is voluntary. As part of its decision, the IRS offered the following:

ISO 9000 certification does not result in future benefits that are more than incidental. The benefits derived from ISO 9000 certification are akin to the current benefits derived from advertising, training, and similar expenditures incurred in operating the taxpayer’s business, retaining existing customers, or simply improving the overall quality or attractiveness of the taxpayer’s business operations. Although the enhanced marketability of the taxpayer’s services or products resulting from ISO 9000 certification may yield future benefits such as repeat business or increased market share, these future benefits are incidental to the primary benefit of current sales.

However, because the IRS has not issued guidance on LEED certification, it is also possible it would conclude that, because LEED certification is associated with an asset that has a useful life that lasts substantially beyond the current year, LEED costs are subject to capitalization.


The increased attention to the environment is a positive development, and the advantages of having a green building or having a LEED-certifiable building are many, just as there are advantages to being ISO 9000 certified. There is no evidence to suggest the growth in popularity of LEED will fade in the near future. But as more and more owners and developers continue to seek LEED certification, the more tax professionals will be faced with questions regarding the proper treatment of the associated certification fee and professional service costs. The guidance included within the context of this discussion suggests that the treatment of LEED certification costs is not an obvious decision.


Frank J. O’Connell Jr. is a partner in Crowe Horwath LLP in Oak Brook, Ill.

For additional information about these items, contact Mr. O’Connell at 630-574-1619 or .

Unless otherwise noted, contributors are members of or associated with Crowe Horwath LLP.

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