The Energy Policy Act of 2005 added section 179D to the Internal Revenue Code. Section 179D permits a deduction for the costs of installing certain energy efficient building systems in commercial buildings.

To claim the deduction, a taxpayer must receive certification of energy savings from a qualified individual (unrelated licensed professional engineer or contractor) who performs a field inspection of the building using qualified software from the Treasury Department's list of certified software to calculate the energy savings and then presents the qualification in writing. Certification for Code section 179D only determines whether the deduction is available. The certification process does not involve determining the cost of the qualifying energy efficient property. A cost segregation study ensures that the amount of the deduction does not exceed the amount of energy efficient property.

Your project may be eligible for a tax deduction of up to $1.80 per square foot for improving the energy efficiency of your existing commercial building or designing high efficiency into a new building. The Energy Policy Act of 2005 includes a tax deduction for investments in “energy efficient commercial building property” designed to significantly reduce the heating, cooling, water heating, and interior lighting energy cost of new or existing commercial buildings.

After preliminarily reviewing the specifications, SMRI determines whether the building would qualify in whole or in part. After obtaining any necessary licenses in the building’s local jurisdiction, a SMRI will perform the energy modeling and analysis and schedule a site visit. The energy modeling may not occur until after the site visit depending on the level of detail available in the plans. Over the years SMRI has consistently encumbered a lack of as built drawings and project submittals. Therefore SMRI recommends on all projects the use of SMRI’s E Document and Library Storage offering.

SMRI then finalizes the section 179D study and provides the building owner with an overview of the energy saving features.

Post the 179D study SMRI recommends a cost segregation study because the certification process for Code section 179D only determines whether the deduction is available. The certification process does not involve determining the cost of the qualifying energy efficient property. SMRI will determine the cost of the qualifying energy efficient property and integrate the section 179D study findings into the cost segregation report. And the result will determine the cost basis of the qualifying property and determine the applicable cap deduction.