Jay Corn - Basics of EPACT 179D for Building Owners, Architects and Engineers

Architects, Engineers and Building Owners:

Creating Value from Untapped

Federal Incentives

Basics of

EPAct - Section 179D

See Required IRS Circular 230 Disclosure 2

Creating Value from Untapped Federal Incentives

Section 179D is a little-known tax

incentive designed to encourage energy

efficient commercial building

construction.

Building Owners can significantly

improve the economics of new

construction projects and renovations of

existing buildings.

Architects, Engineers and Designers

can gain an important competitive

advantage in the marketplace with this

incentive.

EPAct - Section 179D

See Required IRS Circular 230 Disclosure

Presenters

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Jay Corn

Twenty-five years of corporate finance and tax experience in the energy industry; specific focus on negotiating and closing corporate credit facilities, project financings and tax structuring for energy services companies.

BBA from Abilene Christian University; Certified Public Accountant in Texas.

Steven G. Nanos

Thirty years of business development and technical sales in environmental, HVAC and power generation industries with a specific focus on assisting architects, engineers and building owners specify energy efficient equipment and systems for schools, offices, warehouses and manufacturing facilities.

B.S. in Engineering from Rensselaer Polytechnic Institute in Troy, NY.

Claris Energy Corporation

Based in New Jersey, Claris Energy is a team of energy finance, tax and engineering professionals focused on helping our clients maximize federal and

state incentives on renewable and energy efficiency projects.


Creating Value from Untapped Federal Incentives

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AGENDA

1. Learn the basics of EPAct (the Energy Policy Act of 2005) also know as Section 179D incentive.

2. Learn how building owners can improve the economics of their construction projects and energy investments.

3. Understand how the rules for government projects can directly benefit architects, engineers and contractors.

5. Turn your knowledge of the tax incentive into a competitive advantage in the marketplace.

4. Review case studies and learn how to identify projects that may qualify for the incentive.

6. Develop an action plan to create value from the projects you have already completed.

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EPAct Section 179D – The Basics

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6 Section 179D - Policy Objective

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Buildings account for almost 50% of total U.S. energy consumption;

Buildings account for over 75% of U.S. electric consumption. ft.

U.S. building stock will have a relatively high turnover rate over a 25 year period:

Current U.S. building stock 275 billion sq. ft.

Annual demolitions 1.75 billion sq. ft.

Annual renovations 5 billion sq. ft.

Annual new construction 5 billion sq. ft.

Percentage of building stock that will be newly constructed or renovated by 2035

75%

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Section 179D - Policy Objective

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An incentive targeted at the design and construction of energy efficient buildings should have a significant impact on U.S. energy consumption.


Section 179D: The Reference Building

General Rule: Section 179D provides for the immediate expensing of up to $1.80 per sq. ft. for qualifying energy efficiency projects incorporated into commercial buildings.

In order to qualify, the (1) lighting, (2) building envelope and (3) HVAC systems must reduce a building’s energy costs by 50% or more compared to a hypothetical reference building.

New construction and energy efficiency upgrades to existing facilities qualify for the incentive.

Section 179D converts a 39-year

deduction into an immediate tax benefit.


Section 179D: : The Reference Building

The hypothetical building is based on ASHRAE Standard 90.1-2001 reference data modeled using 90.1-2004 Appendix G methodology.

The state energy codes of 36 states exceed ASHRAE Standard 90.1-2001.

IMPORTANT NOTE:

The energy savings comparison is based on a

hypothetical 2001 “reference building” and not to the

actual equipment being replaced.

State Commercial Energy CodesJuly 1, 2011


Section 179D: Partial Deductions

Partial deductions are allowed for the installation of individual subsystems (or any combination of two) that meet a lower standard of efficiency improvement:

Interior lighting – $.30-$.60/sq. ft. deduction for lighting projects based on a sliding scale of energy savings.

Building envelope –$.60/sq. ft. deduction.

HVAC and hot water systems –$.60/sq. ft. deduction.


Required Energy Savings (Partial Measures)

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Energy Savings Percentage Guidance Summary

January 2006 January 2006 March 2012

through through through

December 2008 December 2013 December 2013

Interior lighting systems 16.67% 20.00% 25.00%

HVAC and hot water systems 16.67% 20.00% 15.00%

Building envelope 16.67% 10.00% 10.00%

Partially Qualifying Property - Permitted Percentage Thresholds


The tax incentive can be claimed by a building owner, tenant or ESCO, depending on who pays for and owns the equipment.

“Designers” of government-owned buildings also qualify for the incentive.

The incentive is deductible in the year that the property is placed in service and applies to all projects completed and placed in service from January 1, 2006 to December 31, 2013.

The incentive can be claimed retroactively.

Amended returns can be filed for open tax years (generally 3 years from the date of filing).

For private owners, the IRS has provided for special procedures to claim the incentive for previous tax years on as a change of accounting method on current tax returns.

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Securing the Section 179D Tax Incentive


To claim the deduction, a Section 179D compliance study must be performed by a qualified firm or individual:

The energy savings projected for the measure installed must be confirmed through energy modeling based on specific standards outlined by the IRS in its published guidelines.

The energy savings must be certified by an engineer or contractor independent to the project.

The project cost, estimated energy savings and the associated tax deduction must be documented in the manner prescribed by the IRS.

IRS-approved software must be used for modeling process.

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Securing the Section 179D Tax Incentive


Property Location – The building must be located in the U.S. to be eligible for the 179D incentive

Nonprofit Organizations – Buildings owned by nonprofit organizations are not eligible for the incentive.

REITS – Although REITs are eligible for the incentive, the benefit of the incentive is limited because of their tax structure and the way they distribute taxable income.

S Corporations – S Corporations and other pass-through entities (e.g., LLCs ) are eligible for the incentive but it may be limited in any given tax year by the shareholder’s basis in the S Corporation.

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Special Situations


How Does the Incentive Work?

Few companies know about this incentive. Fewer still are claiming the benefit to which they are entitled.

Incorporating this incentive into your payback analysis could greatly improve the economics of your next project.

A question :

Could you deliver more effective solutions if you could reduce the first-cost of a project by 16% and improve your customer’s payback by almost a full year?

Total square feet of air conditioned space 150,000

Installation of new McQuay WME chiller $250,000

Energy savings achieved vs. ASHRAE 90.1-2001 21%

Tax incentive

Total square feet 150,000

Qualifying tax deduction $0.60

Total tax deduction $90,000

Tax rate 40%

Cash benefit $36,000

Estimated annual energy savings from chiller upgrade $44,000

Section 179D cash incentive as a percentage of the project 15.0%

Improvement in payback due to 179D incentive (in years) 0.9

Office Building - HVAC Upgrade

Project qualifies for $0.60 per sq. ft. tax deduction

since energy savings exceeds 20%.

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EPAct Section 179D – Government Buildings


Since public entities do not pay taxes, the tax incentive attributable to the project is passed through to the “Designer” of the energy efficiency upgrades for any “Government Facility.”

A “Government Facility” includes any building owned by a Federal, State or local public entity including: schools, post offices, airports, military bases, court houses, public universities, town halls, libraries, police departments, fire houses, etc.

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Special Rules for Government Facilities

If you have designed (or helped to design) energy upgrades to a

government facility, the special tax incentive belongs to YOU.


A “Designer” includes any architect, engineer, ESCO contractor, etc. that helps create the technical specifications of the project.

If multiple parties contribute to the design of the facility, the incentive can be allocated in any way that is representative of their contribution.

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Don’t Forget:

The Designer’s tax incentive can be claimed retroactively for all open tax years.


The Section 179D incentive for government facilities provides designers with a unique opportunity to create value:

Profitability – The incentive provides additional margin for your business.

Competitiveness – Access to the incentive leads to increased success on highly competitive projects.

Business Development – Work with the full design team to secure incentives for all.

The special rule for government facilities can be a tool to help you build strong relationships with the architects, engineers and contractors you work with.

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Consultant Architects Engineers Design/Build Contractors

Design Team


The government entity must give the Designer an “Allocation Letter” – a written declaration of the amount and allocation of the deduction.

The government entity has the discretion to allocate the deduction among multiple Designers.

Any authorized party of the government entity can sign the allocation letter – this is often the government employee that is responsible for managing the project and approving its completion.

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Obtaining the Government Incentive

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EPAct Section 179D – Implementation


The energy modeling process is prescribed by IRS and is based on ASHRAE 90.1-2001 reference data modeled using 90.1-2004 Appendix G methodology:

Step 1 – Model the energy use of the subject building after all energy upgrades have been incorporated.

Step 2 – Model the total energy use of reference building designed to ASHRAE 90.1-2001 standards following the methods for baseline building performance in Appendix G of 90.1-2004 (and certain requirements from the 2005 California Title 24 Nonresidential Alternative Calculation Method Approval Manual).

Step 3 – Determine the percentage of energy savings from the difference between Step 1 and Step 2.

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Project Certification – The Modeling Process


IRS approved software must be used to perform the energy modeling.

The list of IRS-approved software includes:

A physical inspection of the building must be performed by a qualified independent firm to determine that the energy efficient measures used in the modeling were installed to specification.

A written certification must be provided by the independent third-party certifying that the energy measures are projected to meet the energy savings requirements of Section 179D.

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Project Certification – The Modeling Process

1. DOE-2.2 6. eQUEST

2. EnergyGauge 7. Green Building Studio

3. EnergyPlus 8. Carrier HAP

4. EnergyPro 9. IES <Virtual Environment>

5. EnerSim 10. Trane Trace 700


Interim lighting rules were adopted to encourage building owners to focus on lighting projects which are easily measured and perceived to have a high impact on building energy efficiency:

Lighting systems (except warehouses) that reduce lighting power density (LPD) by 40% qualify for the full $0.60 incentive.

Lighting systems (except warehouses) that reduce LPD by 25% qualify for a $0.30 incentive. LPD improvements between 25% and 40% are prorated in accordance with IRS Notice 2006-52.

Warehouse lighting systems must reduce LPD by 50% to qualify for the $0.60 deduction (with no proration below 50%).

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Optional Rules for Lighting

Interim Lighting Rules Minimum Maximum

Most commercial buildings

Improvement In LPD

25% 40%

Deduction $0.30 $0.60

Warehouses

Improvement In LPD

n/a 50%

Deduction n/a $0.60


Specific interim lighting rule requirements:

Reductions in LPD are based on the minimum requirements in ASHRAE Standard 90.1-2001’s Table 9.3.1.1 (building area method) or Table 9.3.1.2 (space-by-space method), not including additional interior lighting power allowances.

Bi-level switching must be installed in all occupancies except hotel and motel guest rooms, store rooms, restrooms and public lobbies.

Controls and circuiting (i.e. automatic lighting shutoff) must comply fully with the mandatory and prescriptive requirements of ASHRAE Standard 90.1-2001.

The system must meet the minimum requirements for calculated light levels as established in the 9th Edition of the IES Lighting Handbook.

Optional Rules for Lighting

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How Do I Benefit From the 179D Incentive?


What Projects Should I Focus On?

High Value Buildings

1. Buildings over 50,000 sq.ft.

2. New construction – benefits from multiple efficiency measures.

3. Newly constructed buildings designed to be highly-efficient (e.g., LEED certified buildings).

4. Existing building upgrades - High efficiency HVAC measures and/or re-lighting projects.

4. Most ESCO retrofit projects – benefits from multiple efficiency measures.

5. Any type of housing facility utilizing central HVAC systems, including apartment buildings (4 stories or more), hotels, nursing homes, dormitories, etc.

5. Large, simple structures (warehouses, distribution centers, parking garages, self storage facilities, etc.).

6. Any government facility – the incentive belongs to the design team!


What Projects Should I Focus On?

High Impact HVAC Projects

1. Geothermal (ground source heat pumps).

2. Magnetic bearing chillers (or conventional chillers with VFD’s), especially in buildings <150,000 sq. ft.

3. Thermal storage.

4. Any type of chiller or water source heat pump in housing facilities - apartment buildings (4 stories or more), hotels, nursing homes, dormitories, etc.

5. VRV (variable refrigerant volume) systems, especially in buildings <75,000 sq. ft.

6. Heat recovery ventilation.

7. Demand control ventilation if in combination with another measure.

8. VAV (variable air volume) devices especially in buildings <75,000 sq. ft.

9. Hybrid chiller plant (electric chiller combined with gas chiller for improved thermal efficiency).


Don’t Be Left Behind

Since 2006, millions of dollars have been received by building owners, architects, engineers and contractors from this incentive program.

Your knowledge of the program and an ability to execute on that knowledge can improve your profitability and competitiveness in the marketplace.

Be Proactive - Claim Your Energy Tax Incentive

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Claris Energy’s 179D Certification Process

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Turnkey 179D Certification Process

Screening Process

Cost Estimate

Section 179D Certification

Complimentary project screening.

Helps you narrow the projects that may qualify.

Helps you design new projects to maximize the benefit of the incentive.

You provide Claris with building plans and project specifications.

Detailed feasibility study and project cost estimate provided before we begin.

Energy modeling by qualified 179D modelers.

Property inspection.

Delivery of certification report verifying savings.

IRS required 179D documentation.

Assistance with Allocation Letter on government projects.


Turnkey 179D Certification Solutions

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Claris Energy provides the resources and expertise to help our clients secure the Section 179D tax incentive.

Our team of energy finance, tax and engineering professionals provide a turnkey service that includes the modeling, inspections, independent certifications and tax documentation required by the IRS. Claris Energy's turnkey service shifts the administrative burden of these filings to our 179D professionals, allowing you to focus on your business.

We perform a complete Section 179D study in accordance with the IRS guidelines including:

Calculate and document the deduction.

Perform the energy modeling required to certify the project.

Provide the site inspection and delivery of the certification report required by the IRS.

Assist with obtaining the Allocation Letter from the proper government or public entity official.

Coordinate with your tax department or independent accounting firm.

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Contact Information

Jay Corn

Office: 973.813.1224

Mobile: 862.266.1600

Email: [email protected]

Claris Energy Corporation.

55 Madison Avenue, Suite 400

Morristown, New Jersey 07960

Steven G. Nanos

Office:973.813.1224

Mobile: 609.306.1326

Email: [email protected]

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Thank You For Your Time

Required IRS Circular 230 Disclosure

To comply with requirements imposed by the Department of the Treasury, we inform you that any U.S. tax advice contained in this communication (including any

attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation of any of the matters addressed

herein or for the purpose of avoiding U.S. tax related penalties.

Jay Corn - Basics of EPACT 179D for Building Owners, Architects and Engineers

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