CHICAGO — Uncle Sam, in the form of our tax laws, wants to reward every laundry business that improves the energy efficiency of the building housing its business or plant. In fact, all so-called “commercial buildings” may qualify for this unique tax deduction. Even those that only partially improve energy efficiency may qualify, albeit with a smaller deduction.
While there is some question whether tenants can claim this credit, new guidelines from the Internal Revenue Service make it easier than ever to claim even the partial deduction.
PARTIAL DEDUCTION BASICS REVISED
The IRS originally provided guidelines for achieving a partial deduction for (1) interior lighting systems, (2) heating, cooling, ventilation, and hot water systems, and (3) the building’s “envelope.” Under the amended “permanent rule,” property that would be energy-efficient commercial property except for a failure to achieve the target 50% reduction in energy and power costs is considered partially qualifying commercial building property if it is installed as part of a system that satisfies the applicable energy-savings percentage.
In other words, when it involves the case of a building that does not meet the whole building requirement of a 50% energy savings, a partial deduction is allowed for each separate building system that comprises energy-efficient property. Thus, deductions of 60 cents per square foot are available to owners of buildings in which individual lighting, building envelope, or heating and cooling systems meet target levels that would reasonably contribute to an overall building savings of 50% if additional systems were installed.
The methods for calculating energy efficiency usually take into account the extent that the current systems exceed “typical” performance. The intent of the rules is for any calculation to be fuel-neutral: the same energy-efficiency features will qualify a building for the deduction, regardless of whether the heating source is a gas or oil furnace, or boiler, or an electric heat pump.
The newly revised energy-savings percentages required by the IRS are now 15% for heating, cooling, ventilation, and hot water systems; 25% for interior lighting systems, and heating, cooling, ventilation, and hot water systems; and 10% for the building’s envelope.
OWNER, OWNER, WHO GETS THE CREDIT?
Would a laundry or dry cleaning business that is a tenant in a commercial building and that performs a retrofit meeting the energy-savings requirements qualify for the deduction? Can a tenant in a leased space take advantage of the deduction?
Or, is the deduction for privately owned buildings restricted to the owner?
As in many matters of tax law, the question is not clear. The business that gets the energy-efficient commercial buildings deduction is the one who “owns” the property for tax purposes. Although in many, if not most, instances in which a tenant improvement will revert to the landlord at the end of a lease, the property is not necessarily owned by the landlord for tax purposes.
It is a question of fact, and the determination depends on arrangements between parties. If the tenant pays for the investment, constructs it according to its own specs, and there are no concessions in the lease or from the landlord, it is likely that the tenant will own the improvements for tax purposes and be eligible to claim the deduction.
Fortunately, this is a question that arose under the tax law before the enactment of the energy-efficient commercial buildings deduction. In the case of tenant improvements, the tenant and landlord would have to determine the tax “owner” for purposes of claiming depreciation deductions. The energy-efficient commercial buildings deduction does not change that determination. It simply provides a more beneficial deduction that that normally provided by depreciation.
Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult a tax adviser for advice regarding your particular situation.
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