IRS explains how to qualify for energy efficient commercial building deduction

Notice 2006-52, 2006-26 IRB; IR 2006-88
IRS has issued a notice and an accompanying news release explaining how commercial building owners or leaseholders can qualify for the new Code Sec. 179D deduction for making their buildings energy efficient. The notice establishes a process to certify the required energy savings in order to claim the deduction.

How deduction works. The Code Sec. 179D deduction, which was enacted in the Energy Policy Act of 2005, allows taxpayers to deduct the cost of energy-efficient property installed in commercial buildings. As discussed in detail in Federal Taxes Weekly Alert 08/04/2005, the amount deductible may be as much as $1.80 per square foot of building floor area for buildings that achieve a 50% energy savings target. Notice 2006-52 provides that buildings below the 50% threshold may, nevertheless, qualify for a deduction of up to 60¢ per square foot of building floor area if they meet a 16 2/3% energy savings target.

Certification procedure. Before claiming the deduction, the taxpayer must obtain a certification that the required energy savings will be achieved. A taxpayer need not attach it to his return claiming the deduction. However, a taxpayer claiming a Code Sec. 179D deduction should retain the certification as part of its records for purposes of Reg. § 1.6001-1(a), which requires taxpayers to maintain books and records establishing the entitlement to, and amount of, any claimed deduction. Notice 2006-52 prescribes the content of the certification and the qualifications that must be met by the person providing it.

Software for calculating energy savings. Notice 2006-52 also announces that the Department of Energy will create and maintain a public list of software that must be used to calculate energy savings for purposes of providing the certification. It also provides a process that software developers must use if they desire to have their software included on the list.