5 Green Building Tax Incentives for 2016

Rob Freeman's picture
Rob Freeman
Vice President
January 26, 2016

Up to date for 2016. In addition to 179d, the energy efficient building tax deduction, here are four green building incentives you should know about.

5 Green Building Tax Incentives that can accelerate payback and boost returns on investment.
5 Green Building Tax Incentives that can accelerate payback and boost returns on investment.
Credit: Aaron Patterson via Flickr

Green building owners can achieve energy savings, occupant productivity and a range of financial incentives and government tax credits and deductions.

Financial incentives include long term, low interest rate energy efficiency financing and grants tied to renewable energy investment.

While these incentives change every year, here are five green building programs you should be aware of for 2016:

Section 179d:

Section 179d was extended in 2015 as part of the Tax Extenders Law, and then renewed as part of the Protecting Americans from Tax Hikes (PATH) Act.

After the extension, Section 179d (aka the green building tax deduction) is now set to expire on December 31st, 2016. According to Stuart Kaplow of Green Building Law Update, the 179d deduction was also made retroactive to all of 2015, effectively making 179d available to any properties that have made applicable upgrades after December 31st, 2014.

Download the Free Report: 10 Tax and Financial Incentives for Green Buildings here.

What is Section 179d?

Section 179d offers new or existing building owners a one time depreciation deduction of up to $1.80 per square foot for their installation of energy efficiency measures such as (1) high efficiency interior lighting; (2) efficient building envelopes, or (3) heating, cooling, ventilation (HVAC), or hot water systems.

Qualifying systems must reduce the building’s total energy and power cost by 50% or more in comparison to a building meeting minimum requirements set by ASHRAE Standard 90.1-2007, for buildings placed in service after December 31st, 2015. The ASHRAE Standard was changed from 90.1-2001 with the most recent extension, and the new ASHRAE Standard 90.1-2007 applies to any properties placed in service after December 31st, 2015.

For buildings placed in service prior to January 1st, 2016, reductions in energy costs must be compared to ASHRAE 90.1-2001, which is a less stringent standard.

If a building cannot achieve savings of 50% efficiency or more, a partial deduction is available of up to $0.60 cents per square foot per system (lighting, building envelope, HVAC or hot water systems). Partial deductions must comply with the following requirements: Building envelopes must achieve at least 10% efficiency, HVAC and/or Hot Water must achieve at least 15% efficiency and Lighting must achieve at least 25% efficiency.

Energy savings must be calculated and verified by a qualified professional engineer and by using qualified computer software approved by the IRS. A list of qualified 179d software is provided by the U.S. Department of Energy.

In the past all 179d qualified software had to have been tested according to ANSI/ASHRAE, however, the Department of Energy recently developed the "179d DOE Calculator", a free online tool as a substitute for other premium energy modeling software, that provides calculations to determine eligibility for the 179d federal tax deduction. In just a few clicks you can tell whether your building qualifies.

Energy Investment Tax Credit (ITC)

The Energy Investment Tax Credit, also called the Solar Investment Tax Credit, or "ITC" as it's known, provides a 30% federal tax credit for residential (Section 25D) and commercial (Section 48) solar systems. If it is a residential solar system, the homeowner may claim the federal tax credit on his/her personal income taxes. If a business installs a solar system, the business claims the tax credit.

The ITC was extended by the Emergency Economic Stabilization Act (P.L. 110-343) for eight years back in 2008 and then extended again with the Omnibus Consolidated Appropriations Act (P.L. 114-113) until 2023.

The ITC provides dollar for dollar tax credits for eligible solar systems that begin construction on or before December 31, 2023.

According to the Department of Energy's Database of State Incentives for Renewables and Efficiency (DSIRE) website, the following green building systems are eligible for the ITC:

Business Energy Investment Tax Credit

Solar: The credit is equal to 30% of expenditures, with no maximum credit. Eligible solar energy property includes equipment that uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat.

Hybrid solar lighting systems, which use solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight, are eligible. Passive solar systems and solar pool-heating systems are not eligible.

The Solar ITC declines gradually in the years approaching 2023.
12/31/16-12/31/2019 = 30%
1/1/2020-12/31/2020 = 26%
1/1/2021-12/31/2021 = 22%
1/1/2022- Future Years = 10%

More Applications of the Energy Investment Tax Credit (ITC) With Earlier Expirations

The Energy Tax Credit extension included several amendments for other clean energy sources, including fuel cells, small wind, geothermal heat pumps, microturbines, combined heat and power (CHP), and large wind systems.

Fuel Cells: Expires on 12/31/2016 - The credit is equal to 30% of expenditures, with no maximum credit. However, the credit for fuel cells is capped at $1,500 per 0.5 kilowatt (kW) of capacity. Eligible property includes fuel cells with a minimum capacity of 0.5 kW that have an electricity-only generation efficiency of 30% or higher. (Note that the credit for property placed in service before October 4, 2008, is capped at $500 per 0.5 kW.)

Free LEED v4 Green Associate Practice ExamSmall Wind Turbines: Expires on 12/31/2016 - The credit is equal to 30% of expenditures, with no maximum credit for small wind turbines placed in service after December 31, 2008. Eligible small wind property includes wind turbines up to 100 kW in capacity. (In general, the maximum credit is $4,000 for eligible property placed in service after October 3, 2008, and before January 1, 2009. The American Recovery and Reinvestment Act of 2009 removed the $4,000 maximum credit limit for small wind turbines.)

Geothermal Systems: Expires on 12/31/2016 - The credit is equal to 10% of expenditures, with no maximum credit limit stated. Eligible geothermal energy property includes geothermal heat pumps and equipment used to produce, distribute or use energy derived from a geothermal deposit. For electricity produced by geothermal power, equipment qualifies only up to, but not including, the electric transmission stage. For geothermal heat pumps, this credit applies to eligible property placed in service after October 3, 2008. Note that the credit for geothermal property, with the exception of geothermal heat pumps, has no stated expiration date.

Microturbines: Expires on 12/31/2016 - The credit is equal to 10% of expenditures, with no maximum credit limit stated (explicitly). The credit for microturbines is capped at $200 per kW of capacity. Eligible property includes microturbines up to two megawatts (MW) in capacity that have an electricity-only generation efficiency of 26% or higher.

Combined Heat and Power (CHP) Systems: Expires on 12/31/2016 - The credit is equal to 10% of expenditures, with no maximum limit stated. Eligible CHP property generally includes systems up to 50 MW in capacity that exceed 60% energy efficiency, subject to certain limitations and reductions for large systems. The efficiency requirement does not apply to CHP systems that use biomass for at least 90% of the system's energy source, but the credit may be reduced for less-efficient systems. This credit applies to eligible property placed in service after October 3, 2008.


MACRS - Modified Accelerated Cost Recovery System

Under the federal Modified Accelerated Cost-Recovery System (MACRS), the IRS allows businesses to recover green building investments in certain property through depreciation deductions.

MACRS is a favorite tool of many solar photovoltaic array buyers because it accelerates the rate of return on solar energy investments.

The following chart, from The Butler Firm, shows the benefits of MACRS for solar investments, compared to other assets which may have a depreciation period of over 20 years.

MACRS chart from the Butler Firm

The MACRS establishes a set of "class lives" for various types of property, such as solar and wind, ranging from three to 50 years, over which the property may be depreciated. However, many renewable energy technologies are classified as five-year property.

Under MACRS, eligible green building property investments include:

  • Solar Water Heat
  • Solar Space Heat
  • Solar Thermal Electric
  • Solar Thermal Process Heat
  • Photovoltaics
  • Landfill Gas
  • Wind/Small Wind
  • Biomass
  • Geothermal Electric
  • Fuel Cells
  • Geothermal Heat Pumps
  • Municipal Solid Waste
  • Combined Heat and Power (CHP/Cogeneration)
  • Solar Hybrid Lighting
  • Hydrokinetic Power (i.e., Flowing Water)
  • Anaerobic Digestion
  • Tidal Energy and/or Wave Energy
  • Ocean Thermal
  • Fuel Cells using Renewable Fuels
  • Microturbines
  • Geothermal Direct-Use

Qualifying solar energy equipment is eligible (described above in the ITC section) for a cost recovery period of five years. For equipment on which an Investment Tax Credit (ITC) or a 1603 Treasury Program grant is claimed, the owner must reduce the project’s depreciable basis by one-half the value of the ITC. This means the owner is able to deduct eighty-five percent (85%) of his or her tax basis.

Building owners may take advantage of both the MACRS system and the ITC, and receive both a depreciation deduction of 85% of their tax basis and a credit of 30% (not an apples to apples comparison). For more information on MACRS and solar panels, visit this page on SEIA.org.


Residential Energy Efficiency Tax Credits

Green Home by Garreth WilcockFederal tax credits for residential energy efficiency have been renewed in 2016. These tax credits are also retroactive for 2015 and made available for residential homes (second homes qualify as well, but rentals do not).

Homeowners may receive a tax credit of 10% of cost, up to $500, or 30% of cost with no upper limit.

10% of Cost, Up to $500: Applies to energy efficiency improvements in the building envelope of existing homes and for the purchase of high-efficiency heating, cooling and water-heating equipment. Includes insulation, energy efficient exterior windows, doors, and certain roofs. Note that the cost of labor associated with the install does not qualify, with the exception of HVAC, water heaters and biomass fuel systems.

Efficiency improvements or equipment must serve a dwelling in the United States that is owned and used by the taxpayer as a primary residence. The maximum tax credit for all improvements made in 2011 - 2014 is $500. The cap includes tax credits for any improvements made in any previous year. If a taxpayer claimed $500 or more of these tax credits in any previous year, any purchases made in 2011 - 2014 will be ineligible for a tax credit. Expires December 31, 2016.

ENERGY STAR appliances and products qualify for the tax credits as well. You can find a list of hundreds of ENERGY STAR labeled products on the ENERGY STAR certified products website. Find local ENERGY STAR rebates here.

30% of Cost, with No Upper Limit: Applies to geothermal heat pumps, small wind turbines and solar energy systems for both existing homes and new construction. Principle residences and second homes qualify, but rentals do not. The cost of labor to install the systems does qualify. This credit is almost analogous to the Energy ITC described above, except it's for residential property owners. The credit is set to expire on December 31st, 2016.


PACE Financing

PACE stands for Property Assessed Clean Energy. The term "Property Assessed" refers to the benefits assessment that PACE financing recipients pay off through their property taxes. The structure is similar to a sewer assessment, but it is for energy efficiency.

PACE programs are public private partnerships. Banks underwrite energy efficiency investments, which they fund, and in return municipalities collect the payments with property tax collections. This provides stability and low risk with the flexibility and access to capital of private investment programs.

There are both residential and commercial PACE programs available in many states throughout the U.S. and the adoption of PACE is growing as lenders and municipalities become more familiar with the benefits of PACE.

Commercial PACE Financing: A Better Approach to Building Improvements

PACE offers incredible incentives for owner occupied buildings and for creative investors, regardless of their investment time horizon.

Before PACE, the "old" way of making capital improvements to a property often required enduring negative cash flow. Building owners either committed to investing their own cash out of pocket, or took on incremental debt in the form of short term bank financing. In either case, the return on investment (ROI) associated with the capital improvements was forecasted to occur well into the future, if ever.

However, with PACE financing, the economic benefits of energy conservation MUST outweigh the costs of the conservation measures over their expected useful life (EUL).

Instead of coming out of pocket to fund necessary capital improvements to experience negative cash flow, owners see positive cash flow and no out of pocket costs.

For example, in some states with PACE programs, such as Connecticut CPACE, as shown in the table below, the capital expenditures must generate positive cash flow in year one to be approved.

PACE financing can be used IN COMBINATION WITH the aforementioned MACRS depreciation, 179d tax credit and the Business ITC. How awesome is that?!?

PACE financing varies from state to state, however below is an illustration of "old" vs. "new" approaches in terms of cash flow, with CPACE as an example:

PACE financing

Many PACE proponents across the United States are adopting the Connecticut Green Bank model which combines a thorough underwriting process by Sustainable Real Estate Solutions (SRS) and financing by the CT Green Bank, formerly known as CEFIA.

The Connecticut model also led to the first asset backed securitization of CPACE liens by the CT Green Bank and Clean Fund in San Francisco. The securitization has resulted in greater liquidity for the CPACE market and validation to many skeptics. The CT Green Bank also leads the market with the thoroughness and thoughtfulness of its commercial financing program.

This article is for informational purposes only and is not to be construed as legal or tax advice. Consult a certified public accountant (CPA) and/or licensed attorney for such advice.


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