IRS Issues Notice on Energy-Efficient Commercial Building Tax Deduction

July 31, 2006
BOMA explains the Energy Policy Act of 2005 and the process detailed in the IRS notice

On June 2, the Internal Revenue Service (IRS) issued its long-awaited notice (Notice 2006-52) on Deduction for Energy-Efficient Commercial Buildings qualification. This tax incentive was included in the Energy Policy Act of 2005 passed by U.S. Congress and signed into law in August 2005. Its passage represented a significant victory for BOMA Intl. and the commercial real estate industry.

Specifically, the new law provides for a tax deduction of up to $1.80 per square foot for energy-efficient upgrades that achieve a 50-percent reduction in annual energy costs to the user compared to a base building defined by the ASHRAE/IESNA 90.1-2001 standard. Energy costs refer only to heating, cooling, lighting, and water heating, since only these uses are within the scope of the ASHRAE standard and within the control of the building designer. A deduction of up to 60 cents per square foot will be available for upgrades to each of the three energy-using systems of a building - lighting systems; heating, cooling, ventilation, and water-heating systems; and the building envelope (adding up to the full $1.80 per square foot that is available for new construction if qualifying retrofits are made to each of the three systems). A qualifying building can be any type of commercial building that falls under the scope of the ASHRAE 90.1 standard, including multi-family properties of four or more stories. Energy-efficient property must be put into place between Jan. 1, 2006, and Dec. 31, 2007, to qualify for the deduction.

The notice sets forth interim guidance pending the issuance of regulations. While it is still unclear when the final regulations will be promulgated, the notice does indicate that the IRS and U.S. Treasury Department expect the rules set forth in the June 2 notice to be incorporated into the final regulations. BOMA Intl. and its coalition partners in the Commercial Building Tax Deduction Coalition continue to stress to the Treasury Department that time is of the essence, as it is already in the seventh month of this 2-year program. However, building owners and managers are encouraged to begin retrofits immediately if they wish to take advantage of the tax deduction and not wait for the final regulations. The federal government is notoriously slow in promulgating regulations, and BOMA Intl. and its coalition partners agree that the interim guidance currently available should prove sufficient for moving forward.

Specifically, the notice sets forth a process that allows a taxpayer who owns, or is the lessee of, a commercial building and installs property as part of the commercial building’s interior lighting system; heating, cooling, ventilation, and hot-water system; or building envelope to obtain a certification that the property satisfies the energy-efficiency requirements of statute 179D(c)(1) and (d). The notice also provides for a public list of software programs that must be used in calculating energy and power consumption.

In order to claim the deduction, the taxpayer must obtain certification from a “qualified individual” stating that the required energy savings will be achieved. A “qualified individual” is defined as an individual that:

  • Is not related (i.e. not an employee of the building/company).
  • Is properly licensed as a professional engineer or contractor in the jurisdiction in which the building is located.
  • Has represented to the taxpayer that he/she has the requisite qualifications to provide the certification required or to perform the inspection and testing.

The IRS notice also prescribes the content of the certification. In addition to several other statements that the qualified individual must provide for the taxpayer’s records, he/she must also include a statement indicating that the energy-efficient property incorporated into the building will reduce total annual energy and power costs by 50 percent or more as compared to a reference building that meets the minimum requirements of ASHRAE 90.1-2001 (for new construction or a building retrofitting all three systems). Or, he/she must include a statement indicating that the property/upgrades incorporated into the building will reduce the total annual energy and power costs with respect to the combined usage or the building’s heating, cooling, ventilation, hot-water, and interior lighting systems by 162/3 percent (one-third of the 50-percent reduction) or more as compared to a reference building that meets the minimum requirements of ASHRAE 90.1-2001 (for a building retrofitting any one of the three systems).

Finally, the notice announces that the U.S. Department of Energy (DOE) will create and maintain a public list of software that must be used to calculate energy savings for the purposes of providing the certification. It also provides a process that software developers must use if they desire to have their software included on that list. The list will eventually be posted at (

A copy of the IRS notice can be found on BOMA Intl.’s website at (

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