It Pays To "Go Green":Tax Solutions for Sustainable Development

Reprinted with permission from Tony Constantine at Pease & Associates, Inc.

Everywhere you turn, you are hearing something about “going green.” A decade ago talk of sustainability and environmentalism was reserved for the “tree-huggers”, but now it is coming into the mainstream for a variety of reasons. Sustainability programs are fast becoming a part of social responsibility initiatives for many companies, and it is an investment that has a definite payback. For retailers it may mean lower costs and higher appeal among consumers, while for real estate owners and developers that translates into lower utility costs which is attractive to many prospective tenants.

There are a variety of government programs offering incentives for incorporating sustainability concepts into projects. They range from tax credits and deductions to grants and loan programs and are offered at the local, state, and federal level. While this article gives a broad overview of some of the federal programs that are most applicable to real estate projects, it is not an exhaustive listing of available incentives. It is recommended that you discuss these concepts with a professional to make sure you are maximizing your use of available incentives.


Energy-Efficient Commercial Building Deduction

In 2006, Congress enacted a provision allowing for a tax deduction for energy-efficient commercial buildings applicable to qualifying systems and buildings. The deduction is $1.80 per square foot and is available to owners of new or existing buildings who install interior lighting, HVAC, hot water, or building envelope systems that reduce the building’s total energy and power cost by at least 50% compared to a reference building meeting minimum requirements set by ASHRAE Standard 90.1-2001. There is also a partial deduction of $.60 per square foot for each of the aforementioned building systems. The deduction reduces the property’s depreciable basis similar to depreciation. In essence this provision converts property with a 39-year recovery period to a one-year recovery period.

The deduction is primarily available to building owners, but tenants may qualify as well if they pay for the improvements. Another key feature to this deduction is the way the deduction is handled in the case of a government building. In the case of energy efficient systems installed in or on government property, the tax deduction will be allocated to the person primarily responsible for the design of the system. There is no basis reduction with the deduction in this case. Any architect or engineer using energy efficient design on government buildings, schools, etc. should strongly consider this deduction. All projects must be certified by a qualified engineer.

Depreciation Strategies

The typical depreciation strategies used in commercial real estate also work when considering sustainable development. The use of a cost segregation study in conjunction with an energy-efficient building certification can yield a generous savings. A cost segregation study analyzes components of a building that it is depreciated correctly. Building components are often misclassified as longer-lived assets recovered over 39 years when they could be recovered over 5, 7 or 15 years. These benefits have been enhanced in the past through provisions such as the bonus depreciation rules which provide for a 50% first-year write off of the basis of eligible property. The bonus depreciation rules do not apply for purchases made after 2009.

Business Credits

There is an up to 30% credit available for purchase and installation of energy efficient systems before December 31, 2016. The Business Energy Investment Tax Credit (ITC) is available to eligible companies using technologies such as solar water heat, solar space heat, solar thermal electric, solar thermal process heat, photovoltaics, wind, biomass, geothermal electric, fuel cells, geothermal heat pumps, CHP/cogeneration, solar hybrid lighting, microturbines, and direct-use geothermal energy.

The original use of the equipment must begin with the taxpayer, or the system must be constructed by the taxpayer. In other words, the equipment must be bought new or built by the taxpayer. The equipment must also be placed in service in the year that the credit is taken. Similar to other general business credits, the Energy ITC is a nonrefundable tax credit against regular tax and not applied to alternative minimum tax.

There is another credit of up to $2,000 for homebuilders and manufacturers of new energy efficient homes. Each home needs to be certified by a qualified engineer to ensure that it meets certain energy efficiency standards, located in the US, and purchased from the eligible contractor between December 31, 2005 and January 1, 2010 for use as a residence. Even though the provision expired at the end of 2009, it is still possible to go back to a prior year to get credits for eligible properties. This credit may make sense for low-rise apartments, condos, or certain residential nursing facilities.

Grant Programs

Grant programs are an excellent source of funding for a project. There are several programs available at all levels of government depending on the location and type of project. One of the federal grants that you should be aware of is the US Treasury’s Renewable Energy Grant. This grant program was created in February 2009 and provides a cash grant that can be taken in lieu of the Business Energy Investment Tax Credit discussed above. Grants are available for eligible property placed in service in 2009 or 2010. This grant program is important because it provides direct funding for a project and is not subject to limitation due to alternative minimum tax or the nonrefundable tax credit limitations. Most importantly, the grant is not taxable, and merely reduces the recipient’s basis in the property.


Incorporation of sustainability concepts into development projects can be beneficial in their own right. They offer reduced utility costs as well as a competitive advantage from a marketing standpoint to consumers and tenants. Historically, these improvements have been more expensive than traditional construction alternatives, but with advancing technology and governmental subsidies like the ones described above, the green alternative looks even more appealing. With all of the reasons why it makes financial sense to look at green alternatives to construction methods, we shouldn’t forget that it does have a positive environmental impact as well.

This article was reprinted with permission from Tony Constantine at Pease & Associates, Inc. Pease & Associates, Inc. is an accounting, tax and consulting firm with offices in Cleveland, Ohio. Their core team of members have been together and providing professional services for more than twenty years. If you would like additional information about this article and/or wish to explore available green construction alternatives and incentives for your next project, you can e-mail Tony Constantine at

1 comment :

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There are a variety of government programs offering incentives for incorporating sustainability concepts into projects.