Energy-Efficient Commercial Buildings Deduction Revisited

By Michelle Shuerman, CPA, Minneapolis, Minn.

Co-Editors: Michael Metz, CPA; Nick Gruidl, CPA, MBT

The deduction available for updating or constructing more energy-efficient commercial building property has been previously discussed; see Schuerman, Tax Clinic, "Energy-Efficient Commercial Buildings Deduction,” TTA, April 2006. At that time, little guidance was available on how to take the deduction under new Sec. 179D. Since then, the IRS issued Notice 2006-52, providing interim guidance, pending the release of regulations.


The deduction is available for taxpayers that own or lease commercial buildings. To qualify, the energy-efficient property must meet the following requirements:

  • It is installed on or in any building located in the U.S. and is within the scope of American Society of Heating, Refrigerating, Air Conditioning Engineers (ASHRAE) Standard 90.1-2001 (see Notice 2006-52, Sections 5.02 and 5.06, for a complete description);

  • It is installed as part of (1) the interior-lighting systems, (2) the heating, cooling, ventilation and hot-water systems or (3) the building envelope; and

  • The taxpayer has certification that installation of such property will reduce total annual energy and power costs by 50% or more, compared to a “reference building” that meets the minimum requirements of ASHRAE Standard 90.1-2001. (The required 50% reduction must be accomplished solely through energy and power cost reductions for the heating, cooling, ventilation, hot-water and interior-lighting systems. Reductions in any other energy uses, such as receptacles, process loads, refrigeration, cooking and elevators, are not taken into account.)

The maximum deduction allowed cannot exceed $1.80 times the building’s square footage, less the aggregate of any prior-year’s deductions taken for the building under Sec. 179D. If multiple taxpayers install energy-efficient commercial building property on or in the same building, the maximum deduction that may be taken by all such taxpayers cannot exceed such amount.

Square footage: In determining a building’s square footage, all conditioned areas with headroom height of 7.5 feet or greater are included, such as basements, mezzanines, intermediate-floored tiers and penthouses. Items not included are covered walkways, open roofed-over areas, porches or similar spaces, exterior terraces or steps, chimneys, roof overhangs and similar features. Any enclosed space in the building that qualifies as cooled or heated space (i.e., output capacity of the cooling or heating system exceeds 5 British thermal units (BTU) per hour per square foot of floor area) is included, as is indirectly conditioned space (defined as an enclosed space heated or cooled indirectly by being connected to adjacent spaces).


Taxpayers must use the performance rating method (PRM) to compute the percentage reduction in total annual energy and power costs. Under the PRM, a reference building is used as a standard to compare to the taxpayer’s building (proposed building). The reference building must be located in the same climate zone and be otherwise comparable to the taxpayer’s building, except that the interior-lighting, heating, cooling, ventilation and hot-water systems, and the building envelope, must meet the minimum requirements of ASHRAE Standard 90.1-2001. The first step is to subtract the proposed building’s annual costs from those of the reference building. This difference is then divided by the reference building’s annual energy and power costs to determine the percentage reduction:

Percentage reduction =
Reference building annual costs – Proposed building annual costs

Reference building annual costs

Example: The annual costs of a reference building are $700; the annual costs of a proposed building are $300. Thus, there is a 57% (($700 – $300)/ $700) reduction in energy costs.


Sec. 179D(d)(6) requires a taxpayer to receive certification to ensure that the building complies with energy savings plans and targets. Sec. 179D(d)(6)(C) required certification from a “qualified individual,” but did not define the term. Section 5.05 of Notice 2006-52 defines a qualified individual as one who:

  • Is not related to the taxpayer (within the meaning of Sec. 45(e)(4));

  • Is an engineer or contractor properly licensed as a professional engineer or contractor in the jurisdiction in which the building is located;

  • Represents in writing to the taxpayer that he or she has the requisite qualifications to provide the certification required under Section 4 of the notice or to perform the inspection and testing described in Section 4.05.

Notice 2006-52, Section 4, details the items that must be included in the certification to satisfy Sec. 179D(c)(1). Taxpayers need not attach the certification to the return on which the deduction is taken; however, they must maintain sufficient books and records to establish the qualification and amount of the claimed deduction. Information required includes the name, address and telephone number of the qualified individual providing the certification; the address of the building to which the certification applies; a statement that the installed components meet the required percentage reduction of energy costs; a statement that qualified computer software was used to make the calculation; and identification of the software used. The Department of Energy is responsible for creating and maintaining a list of software that may be used to calculate energy and power consumption and costs for purposes of providing the required certification. Currently, there are four approved software programs; see

Subject to certification, a taxpayer may take a partial deduction if one of the systems allowed under Sec. 179D(c)(1)(C) (i.e., interior-lighting, heating, cooling, ventilation and hot-water systems, or the building envelope) reduces the total annual energy and power costs by 16⅔% or more when compared to ASHRAE Standard 90.1-2001. The maximum partial deduction available is up to 60¢ per square foot.

Effective Date

As originally written, Sec. 179D applied to property placed in service after 2005 and before 2008. The Tax Relief and Health Care Act of 2006 extended the placed-in-service date to before 2009. There are also several bills now before Congress to extend this date even further and to increase the deduction allowed.

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