Tax deductions for Factory and Warehouse Upgrades

The Energy Policy Act of 2005 has a clause allowing building owners and other users to take a tax deduction for energy efficiency improvements. Good news, right?

Even better news, you can get up to $1.80 per square foot of building floor-space!

Does my building qualify?

The building must either:

  • be used primarily for commercial purposes
  • be used for industrial purposes, although industrial process machinery and systems are excluded (like compressed air, milling machines, etc.) from the Standard (and therefore from the 179D tax deduction). Warehouses would be included provided they are heated and cooled by at least the minimum levels specified (see below).
  • be a building that has been converted from other uses to primarily commercial use, or
  • be an unconditioned attached or detached garage space as referenced by Tables and of Standard 90.1-2001

Which energy projects qualify?

Standard 90.1-2001 applies to the building envelopes (see notes below), HVAC systems, service water heating systems, electric power distribution and metering, electric motors and belt drives, and lighting.

What about warehouses?

Warehouses can qualify if the enclosed spaces are at least minimally conditioned with a heating system of at least 3.4 Btu/hour/ft2 or a cooling system of at least 5 Btu/hour/ft2. For a 100,000-square-foot warehouse, you would need at least a 340,000Btu/hour heater OR 500,000 Btu/hour (40 tons) air conditioner. Your facilities manager should be able to tell you if the warehouse qualifies.

What else do I need to do?

The amount of energy savings has to be greater than the amount of energy used by a similar ASHRAE 90.1-2001 code-compliant building. The threshold for whole buildings is 50%, but projects like lighting upgrades only need to be 25% better, heating and air conditioning only 15% better, and building envelope windows, doors, etc., only 10% better than the energy use of a similar building meeting the ASHRAE standard. See our example below for more specifics.

Who can help me get this tax deduction?

Your tax accountant should be familiar with this deduction, and they may or may not have the resources to verify the actual energy savings and document it. Typically either an engineer (with a Professional Engineers’ license) or a contractor of the equipment installed can perform the verification. The accounts should be able to provide the tax forms (see the links below).

Here’s a hypothetical example:

Cosgrove, Inc. upgraded its Hartford, CT, manufacturing plant in 2014. The company made the investment in improving lighting quality in their 40,000-square-foot space in an effort to reduce part-quality issues. The energy coach they hired to find and manage energy projects, and acquire electricity and natural gas utility incentives, brought the 179D tax deduction to their attention.

Lighting: they replaced 178 light fixtures (the old 160-watt T-8 fluorescent bulb type) with 178 32-watt LED fixtures. The total cost of the project including labor was $44,500. The local electric utility paid them a $5,200 energy incentive, and the company will save $16,000 per year in electricity costs ($0.14/kWh on 6000 hours / year “on.”) No change/decrease in lighting levels (foot candles) was allowed due to the critical machining tasks being performed on the shop floor. This was verified by an independent engineer using a light meter after installation, compared to the known levels before the retrofit. The expected tax deduction is $0.60/ sq ft * 40,000 sq ft = $24,000 for the 2014 tax year. Taking all incentives, cost-savings and tax deductions into account, the LED lighting project has an ROI of $45,200/$44,500 = 101%, or a one-year payback.

Next steps:

If you think your energy projects of the past 3 years may qualify, reach out to your CPA/accounting firm, or the company that installed the equipment. You may want to reference these documents, or contact your CPA for more information:


What else do you know about this tax deduction?

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