Commercial Building Tax Deduction

June 27, 2013

Overview

• Part I: 179D Internal Revenue Code – Background

– What is 179D?

– Who qualifies

– Financial incentives explained

– Future Expansion of Tax Incentive

– Example Project

• Part II: Services provided by Greenergy?– Who is Greenergy (credentials, past projects)

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179D Internal Revenue Code

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Background

• Commercial building electricity costs:

– 40%/40%/20% - Lighting/Motors & HVAC/Other *

• 80% of commercial buildings still use pre-1986 lighting systems*

– Issue: initial capital investment

– Incentive: 179D Tax Deduction*Source: US Department of Energy

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What is 179D?

• Internal Revenue Code 179D:– A tax deduction for energy-efficient buildings

“Energy Efficient Commercial Building Tax Deduction” (CBTD)

• Enacted: Energy Policy Act 2005– Extended twice:

• Energy Independence Act 2007

• Emergency Economic Stabilization Act 2008

• Current expiration: Dec 31st 2013 • Current bill in the US senate will extend tax incentive to the

end of 2016 and increase the deduction from $1.80 per sqftto $3.00 per sqft

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What is 179D?• Commercial building owners and lessees who purchase and

install energy-saving products in their businesses can qualify for a tax deduction.

• Buildings achieving a 50% reduction in annual energy costs as compared to a baseline building defined by the industry standard ASHRAE/IESNA 90.1-2001 qualify for the full deduction of $1.80/sqft

• Buildings achieving as little as 10% in annual energy costs qualify for the minimum tax deduction of $0.60/sqft

179D Code states: (a) In generalThere shall be allowed as a deduction an amount equal to the cost of energy efficient commercial building property placed in service during the taxable year.(b) Maximum amount of deductionThe deduction under subsection (a) with respect to any building for any taxable year shall not exceed the excess (if any) of—(1) the product of—

(A) $1.80, and (B) the square footage of the building, over

(2) the aggregate amount of the deductions under subsection (a) with respect to the building for all prior taxable years

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Qualifying Buildings

• Energy Efficient Buildings means property -

1. located in the United States

2. which is installed as part of—(i) the interior lighting systems,

(ii) the heating, cooling, ventilation, and hot water systems, or

(iii) the building envelope

and

3. installed as part of a plan designed to reduce the total annual energy and power costs between 10-50% in comparison to a reference building

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Qualifying Buildings

Building Types:

• Offices

• Retail stores

• Warehouses

• Apartments (4 stories +)

• Public buildings

• NO: Churches

Construction Types:

• New Construction

• Additions

• Retrofits– Only applicable to

retrofitted square footage

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Who Benefits?

Public buildings

• Public building allowed to pass tax savings on to Designer

• If more than one designer, building owner decides who gets the deduction

Private buildings

• Building owner– Accelerated Depreciation

(Recover Equipment expense in 1 year compared to the normal 39 year recovery period)

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Public Buildings• Allocation of tax deduction to the designer

• A designer is a person that creates the technical specifications for installation of energy efficient commercial building property

• Includes: an architect, engineer, contractor, environmental consultant or energy services provider who creates the technical specifications for a new building or an addition to an existing building that incorporates energy efficient commercial building property

• A person that merely installs, repairs, or maintains the property is not a designer

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Financial Incentive

• Deduction in first year placed in service• Covers up to the complete cost of the efficient equipment including labor and designer cost

– Don’t have to depreciate over several years

• Up to $1.80 per sq. ft (tax deduction)• Accelerated Depreciation for private building owners• Allocation of tax deduction to design firm for public buildings

• Agreement between public entity and designer is reached for allocating the funds– e.g. endowments, donations, reduced costs on future jobs

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Financial Incentive

Source: US Department of Energy-Office of Energy Efficiency & Renewable Energy

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Maximum Allowable Tax Savings – EPACT 2005

Financial Incentive

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Maximum Allowable Tax Savings – changes under Notices 2006-52, 2008-40, 2012-26

Source: National Electrical Manufacturers Association (NEMA) Guide to the Energy Efficient Commercial Buildings Deduction

Financial Incentive

• Each system is evaluated separately and is eligible for one third of the tax deduction if it meets its share of the overall savings goal for the building, a 50 percent reduction in energy costs.

• In other words:– one system meets the goal of reducing costs by 16 2⁄3

percent but the other two systems do not reduce costs at all, the building owner is entitled to a tax deduction of 60 cents per square foot off the cost of the system.

– Likewise, the owner is eligible for a deduction of $1.20 per square foot off the cost if two systems qualify, reducing energy costs by 33 1⁄3 percent.

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Future Expansion of Tax Incentive

• Proposed to the US Senate on September 20th, 2012• Will extend tax incentive to the end of 2016• Includes buildings located in US territories• Increases tax deduction from $1.80/sqft to $3.00/sqft for new

construction• For renovations maximum incentive of $4.00/sqft• Includes multifamily housing of 5 or more units• The allocation of the deduction for public buildings will include

people responsible for funding, financing, designing, leasing, operating or placing in service energy efficient measures– This includes building tenant, financier, architect, professional

engineer, licensed contractor, energy service company or other building professional

• Nonprofits will be able to allocate deduction for their buildings

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Example for a Public Building

• 1,000,000 sqft newly constructed energy efficient building

• Fully qualifies for the tax incentive

• Tax Deduction - $1.80/sqft x 1,000,000 = $1,800,000

• $1,800,000 deduction passed onto designer

• Corporate tax rate - 35%

• Tax Savings - 35% x $1,800,000 = $630,000

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Services Provided by Greenergy

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Credentials

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• Professional Engineering license in IL, CA, OR, WA, UT, AZ, CO, PA, IN, TX, GA, FL

• Insured up to $2M for errors and emissions as a Professional Engineering company

• Experienced Energy Modelers• Utilizes Department of Energy EQUEST software • Working knowledge of ASHRAE 90.1-

2001, Appendix G, and NREL/TP550-40467• Completed 100s of buildings

• Staff of Verification Engineers• Certified Public Accountant services

Completed 179D Projects

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• Davis Monthan Air Force Base – 41 buildings modeled

• Toyota Park Dealership• Dunkin Donuts• Pasco County Hurricane

Shelter• Fort Bend Administration

Building• Austin Parkway Elementary

School• Dulles High School• Elkins High School• Highlands Elementary School• Hodges Bend Middle School• Sam Gibbons Federal

Courthouse

• Hunters Glen Elementary School

• Kempner High School

• Lake Olympia Middle School

• Macario Garcis Middle School

• Palmer Elementary School

• Pecan Grove Elementary School

• Quail Valley Middle School

• Sienna Crossing Elementary School

• Sugarmill Elementary School

• Fort Benning Army Base – 56 buildings modeled

Terminology

• Reference Building is a building that is located in the same climate zone as the taxpayer’s building and is otherwise comparable to the taxpayer’s building except that its interior lighting systems, heating, cooling, ventilation, and hot water systems, and building envelope meet the minimum requirements of Standard 90.1-2001

• Qualified Individual - (1) Is not related to the taxpayer claiming the deduction under § 179D; (2) Is an engineer or contractor that is properly licensed as a professional engineer or contractor in the jurisdiction in which the building is located; and (3) Has represented in writing to the taxpayer that he or she has the requisite qualifications to provide the certification required.

• Designer - a person that creates the technical specifications for installation of energy efficient commercial building property. For example, an architect, engineer, contractor, environmental consultant or energy services provider who creates the technical specifications for a new building or an addition to an existing building. A person that merely installs, repairs, or maintains the property is not a designer.

• Interim Rule - (i) Achieve a reduction in lighting power density of at least 25 percent (50 percent in the case of a warehouse) of the minimum requirements in Table 9.3.1.1 or Table 9.3.1.2 (not including additional interior lighting power allowances) of Standard 90.1-2001.

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