Energy Efficient Commercial Buildings Tax Deduction

CATEGORY: Private Education Matters
CLIENT TYPE: Private Education
DATE: Nov 07, 2022

The IRA provides a tax deduction of up to $5.00 per square foot for a qualified building when 50% energy savings is achieved per year and certain prevailing wage and apprenticeship requirements are met.  If such prevailing wage and apprenticeship requirements are not met, the maximum deduction available is $1.00 per square foot.  A qualified building means any building located in the United States that was originally placed in service not less than 5 years before the establishment of the qualified retrofit plan with respect to such building.

The tax deduction is available for new commercial buildings or for retrofitting an existing commercial building with energy-efficient systems, equipment, and components, such as interior lighting systems, heating, cooling, ventilation, and hot water systems, or the building envelope (i.e., the physical barrier between the exterior and interior environments enclosing the building), and is installed as part of a plan designed to reduce the total annual energy and power costs of the building by 25 percent or more.  This tax deduction is available for taxable years beginning after December 31, 2022.

For tax-exempt entities, the tax deduction is passed on to the design professional (licensed within the state where the building is located), with the intent that the designer will use energy-efficient systems, equipment, and components in the project’s construction and pass savings on to the tax-exempt entity.

As such, we recommend that tax-exempt entities ensure that their contracts with design professionals and contractors include terms that provide for the passing along of these savings to the nonprofit organization.  We also recommend that tax-exempt entities confirm that the contracts include any applicable prevailing wage and apprenticeship requirements.

Energy Efficiency Materials Pilot Program

The Energy Efficiency Materials Pilot Program set aside $50 million for nonprofit 501(c)(3) organizations that own (not rent) and operate their own buildings to purchase energy efficiency materials including (1) a roof or lighting system or component of the system; (2) a window; (3) a door, including a security door; and (4) heating, ventilation, or air conditioning system or component of the system (including insulation and wiring and plumbing improvements needed to serve a more efficient system).  At this time, the U.S. Department of Energy estimates that the application to apply for these grants will open during the second quarter of 2023.

Construction Corner

LCW represents and advises private schools and colleges in various business, construction, and facilities matters, including all aspects of construction projects from contract drafting and negotiations to course of construction issues.  Through this Construction Corner, LCW will be giving private schools and colleges monthly helpful tips on a variety of topics applicable to campus construction projects.  LCW attorneys are available should you have any questions or need assistance with any construction projects no matter what phase you may be in currently.

Hiring a Design Professional

Under California law, a “design professional” can mean a licensed architect, licensed landscape architect, registered professional engineer, or licensed land surveyor.  Design professionals, especially architects, help to take a school’s overall concept, goals, and ideas for a construction project and reduce them to an executable plan.  With regard to hiring an architect, we recommend the following:

  1. Consider obtaining referrals for architects from other private schools or colleges, and from professional architect associations;
  2. Consider sending out a request for qualifications to several architects to ascertain the architect’s demonstrated competence, professional qualifications, and experience designing and constructing the type of building or project the school is renovating or constructing;
  3. Consider proposals from several architects;
  4. Consider interviewing several architects, and prepare questions for those interviews in advance;
  5. Consider whether the architect shares the school’s vision for the project, including matters like the architectural style and energy efficiency, environmental, and sustainability goals;
  6. Check the architect’s references;
  7. Confirm the architect and any design professionals hired by the architect are properly licensed. Architects must be licensed by the California Architects Board, and cities and counties will only issue pre-construction permits if the architect who prepared the plans and specifications signs a statement that he or she is properly licensed.  Licenses for design professionals can be verified with the Department of Consumer Affairs (https://search.dca.ca.gov/);
  8. Select an architect based on the architect’s competence, qualifications, experience, and references, the school’s project and budget needs, and whether the architect shares the school’s vision for the project; and
  9. Execute a contract with the architect that has been prepared or reviewed by the school’s legal counsel. Stay tuned for a future Construction Corner article on Contracting with Design Professionals.

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