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Notice 2012-22 - Deduction for Energy Efficient Commercial Buildings

In February, the IRS released Notice 2012-22 which relates to the deduction for energy efficient commercial buildings under S. 179D, modifying Notice 2008-40, which clarified and modified Notice 2006-52.  The new Notice provides revised energy savings percentages that taxpayers may use to qualify for a partial deduction, rather than the full deduction, under S. 179D.

As background, S. 179D permits an owner or lessee of a commercial building to deduct a part or all of the cost of energy efficient commercial building property the taxpayer places in service.  Per statute, “energy efficient commercial building property” is depreciable property that satisfies that following:

  •  “is installed on or in any building that is located in the United States and is within the scope of Standard 90.2001;” 
  •  “is installed as part of the interior lighting systems; the heating, cooling, ventilation, and hot water systems; or the building envelope;” and
  •  “is certified that the interior lighting systems, heating, cooling, ventilation, and hot water systems, and the building envelope that have been incorporated into the building, or that the taxpayer plans to incorporate into the building subsequent to the installation of such property, will reduce the total annual energy and power costs with respect to the combined usage of the building’s heating, cooling, ventilation, hot water, and interior lighting systems by 50 percent or more as compared to a Reference Building that meets the minimum requires of Standard 90.1-2001.”

Meeting these requirements permits a taxpayer to take the full deduction permitted – which cannot exceed the excess (if any) of (i) the product of $1.80 and the square footage of the building, over (ii) the aggregate amount of the S. 179D deductions allowed with respect to the building for all prior taxable years.

Property that would be classified as an energy efficient commercial building property but for failing to achieve the above-cited 50 percent benchmark may be classified as a “partially qualifying building property” if it is installed as part of a system that satisfies the applicable energy savings percentage found in applicable Notices.  Notice 2006-52 provided a 16 2/3 percent applicable energy savings percentage for each of the three systems (lighting system; heating, cooling, ventilation, and hot water system; and building envelope) and Notice 2008-40 adjusted these percentages and is applicable to buildings placed in service between December 31, 2008 and December 31, 2013 (overlapping with new Notice 2012-22).  The energy savings percentages under Notice 2008-40 were 20 percent for interior lightings systems; 20 percent heating, cooling, ventilation, and hot water systems; and 10 percent for the building envelope.

Under the current Notice, the applicable energy savings percentage for heating, cooling, ventilation and hot water systems is 15 percent, 25 percent for interior lighting system and 10 percent for the building envelope.  The energy savings percentages is available to buildings placed in service after the effective date of the Notice.  If S. 179D is extended beyond December 31, 2013, in the absence of other changes to the statute, the energy savings percentages set forth in Notice 2012-22 must be used.  Until December 31, 2013, taxpayers may use the percentages provided in Notice 2008-40 or the percentages in Notice 2012-12. 

The partial deduction for each system is limited to $.60 per square foot and the sum of all partial S. 179D deductions claimed cannot exceed the excess (if any) of (i) the product of $1.80 and the square footage of the building, over (ii) the aggregate amount of the S. 179D deductions allowed with respect to the building for all prior taxable years.

View the complete text of IRS Notice 2012-22.

Aninda Dhar is a Senior Tax Manager with extensive experience in federal and international tax matters. Aninda provides tax consulting services to entities in numerous industries and serves a diverse roster of clients.

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