What if a commercial building tenant performs a retrofit that would meet the energy savings, would they get the deduction? Is the deduction for privately owned buildings restricted to the owner, or can a management company or a tenant in a leased space take advantage of the deduction? Here’s another question. The tax deduction is to be given to the owner of the lighting system. Do you believe this enables ESCOs, if they own the lighting system until the end of their performance contracts, to claim the tax deduction for themselves as the legal owner of the lighting system? Could the building owner even do it legally if the ESCO is the owner under the performance contract?  

Unfortunately, as in many matters of tax law, the answer is not necessarily clear. The person who gets the Commercial Buildings Deduction is the person who owns the property for tax purposes.

Although in many, if not most instances, a tenant improvement will revert to the landlord at the end of a lease, the property is not necessarily owned by the landlord for tax purposes. It is a question of fact, and the determination depends on the arrangements between the parties. If the tenant pays for the investment, constructs it according to its own specifications, and there are no concessions in the lease or from the landlord, it is likely that the tenant will be the owner of the improvements for tax purposes and eligible to claim the Commercial Buildings Deduction.

Fortunately, this is a question that arose under the tax law before the enactment of the Commercial Buildings Deduction provision. In the case of tenant improvements, the tenant and landlord would have to determine who the tax owner is for purposes of claiming depreciation deductions in any event. The Commercial Buildings Deduction does not change that determination. The Commercial Buildings Deduction simply provides a more beneficial deduction that that normally provided by depreciation.

The analysis is the same regarding improvements in government buildings. If the contractor is the owner for tax purposes, it can claim the Commercial Buildings Deduction. Whether a private person can be an owner of property with respect to a government building under the applicable local law is a factor that would have to be taken into account in determining who the owner is for tax purposes.

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