The section 179D deduction is currently set to expire on December 31, 2013. However, the Obama Administration’s fiscal year 2014 proposal would increase both the maximum deduction and the partial deduction available for the installation of energy-efficient commercial building property.
The proposal would raise the current maximum deduction to $3.00 per square foot (from $1.80 per square foot) and the maximum partial deduction allowed with respect to each separate building system to $1.00 per square foot (from $0.60 per square foot).
For satisfying the energy savings targets for both building envelope and HVAC and hot water systems, the proposal would increase the maximum partial deduction to $2.20 per square foot (from $1.20 per square foot). Energy-savings targets would be updated every three years by the Secretary of Treasury in consultation with the Secretary of Energy to encourage innovation by the commercial building industry.
The proposal also would provide a new deduction based on a combination of the projected and realized energy savings performance achieved by retrofitting existing commercial buildings. The deduction would only be applicable to existing buildings with at least 10 years of occupancy. The deduction would be capped at 50% of the total cost of implementing the plan. The deduction would be allowed on a sliding scale ranging from $1.00 per square foot of retrofit floor area, for energy savings of at least 20%, up to $4.00 per square foot of retrofit floor area, for energy savings of 50% or more. Sixty percent (60%) of the deduction would be available when the property is placed in service and would be based on the projected energy savings performance of the commercial building retrofit plan. The remaining 40% of the allowable deduction would be available at a later point and would be based on actual energy savings performance of the retrofit plan. Actual energy savings would be based on the energy usage of the commercial building after the retrofit plan is complete, as determined by methods and procedures provided by Secretary of Treasury in consultation with Secretary of Energy.
Special rules would also be provided to allow the credit to benefit a real estate investment trust (REIT) or its shareholders.
The new deduction would be permanent and would be available for property placed in service after 2013. The existing Section 179D deductions would remain in place until the end of 2013. We will be keeping an eye on the budget process over the course of the next six weeks.