Jay Corn - EPAct 179D is an Important Tax Incentive for Architects and Engineers


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The EPAct 179D tax incentive provides a special incentive that directly rewards architects, engineers and contractors for the design of energy efficient projects in government-owned buildings - Jay Corn and Steve Nanos of Claris Energy show you how to claim your incentives.

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Jay Corn - EPAct 179D is an Important Tax Incentive for Architects and Engineers

  1. 1. Basics of EPAct - Section 179DArchitects, Engineers and Building Owners: Creating Value from Untapped Federal Incentives
  2. 2. Creating Value from Untapped Federal Incentives EPAct - Section 179D  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.See Required IRS Circular 230 Disclosure 2
  3. 3. Presenters 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. 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.See Required IRS Circular 230 Disclosure 3
  4. 4. Creating Value from Untapped Federal Incentives 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. 4. Review case studies and learn how to identify projects that may qualify for the incentive. 5. Turn your knowledge of the tax incentive into a competitive advantage in the marketplace. 6. Develop an action plan to create value from the projects you have already completed.See Required IRS Circular 230 Disclosure 4
  5. 5. EPAct Section 179D – The Basics 5
  6. 6. 6Section 179D - Policy Objective 6 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 75% renovated by 2035 6
  7. 7. Section 179D - Policy Objective An incentive targeted at the design and construction of energy efficient buildings should have a significant impact on U.S. energy consumption.See Required IRS Circular 230 Disclosure 7
  8. 8. 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.See Required IRS Circular 230 Disclosure 8
  9. 9. Section 179D: : The Reference Building State Commercial Energy Codes  The hypothetical building is based on July 1, 2011 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.See Required IRS Circular 230 Disclosure 9
  10. 10. 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.See Required IRS Circular 230 Disclosure 10
  11. 11. Required Energy Savings (Partial Measures) Energy Savings Percentage Guidance Summary Partially Qualifying Property - Permitted Percentage Thresholds 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%See Required IRS Circular 230 Disclosure 11
  12. 12. Securing the Section 179D Tax Incentive  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.See Required IRS Circular 230 Disclosure 12
  13. 13. 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.See Required IRS Circular 230 Disclosure 13
  14. 14. Special Situations  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.See Required IRS Circular 230 Disclosure 14
  15. 15. How Does the Incentive Work? Office Building - HVAC Upgrade  Few companies know about this incentive. Fewer still are claiming the Total square feet of air conditioned space 150,000 benefit to which they are entitled. Installation of new McQuay WME chiller $250,000 Energy savings achieved vs. ASHRAE 90.1-2001 21%  Incorporating this incentive into your payback analysis could greatly Project qualifies for $0.60 per sq. ft. tax deduction improve the economics of your next since energy savings exceeds 20%. project. Tax incentive Total square feet 150,000  A question : Qualifying tax deduction $0.60 Total tax deduction $90,000 Could you deliver more effective Tax rate 40% solutions if you could reduce the Cash benefit $36,000 first-cost of a project by 16% and improve your customer’s payback Estimated annual energy savings from chiller upgrade $44,000 by almost a full year? Section 179D cash incentive as a percentage of the project 15.0% Improvement in payback due to 179D incentive (in years) 0.9See Required IRS Circular 230 Disclosure 15
  16. 16. EPAct Section 179D – Government Buildings 16
  17. 17. Special Rules for Government Facilities  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. If you have designed (or helped to design) energy upgrades to a government facility, the special tax incentive belongs to YOU.See Required IRS Circular 230 Disclosure 17
  18. 18. Special Rules for Government Facilities  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. Don’t Forget: The Designer’s tax incentive can be claimed retroactively for all open tax years.See Required IRS Circular 230 Disclosure 18
  19. 19. Special Rules for Government Facilities  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. Consultant Architects Engineers Design/Build Contractors Design TeamSee Required IRS Circular 230 Disclosure 19
  20. 20. Obtaining the Government Incentive  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.See Required IRS Circular 230 Disclosure 20
  21. 21. EPAct Section 179D – Implementation 21
  22. 22. Project Certification – The Modeling Process  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.See Required IRS Circular 230 Disclosure 22
  23. 23. Project Certification – The Modeling Process  IRS approved software must be used to perform the energy modeling.  The list of IRS-approved software includes: 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  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.See Required IRS Circular 230 Disclosure 23
  24. 24. Optional Rules for Lighting  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%). Interim Lighting Rules Minimum Maximum Improvement Most 25% 40% In LPD commercial buildings Deduction $0.30 $0.60 Improvement n/a 50% Warehouses In LPD Deduction n/a $0.60See Required IRS Circular 230 Disclosure 24
  25. 25. Optional Rules for Lighting  Specific interim lighting rule requirements:  Reductions in LPD are based on the minimum requirements in ASHRAE Standard 90.1- 2001’s Table (building area method) or Table (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.See Required IRS Circular 230 Disclosure 25
  26. 26. How Do I Benefit From the 179D Incentive? 26
  27. 27. 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!See Required IRS Circular 230 Disclosure 27
  28. 28. 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).See Required IRS Circular 230 Disclosure 28
  29. 29. Don’t Be Left Behind Be Proactive - Claim Your Energy Tax Incentive  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.See Required IRS Circular 230 Disclosure 29
  30. 30. Claris Energy’s 179D Certification Process Turnkey 179D Certification Process Screening Cost Section 179D Process Estimate Certification  Complimentary  You provide Claris  Energy modeling by project screening. with building plans qualified 179D and project modelers. specifications.  Helps you narrow  Property inspection. the projects that  Detailed feasibility  Delivery of may qualify. study and project certification report cost estimate verifying savings. provided before we  Helps you design begin.  IRS required 179D new projects to documentation. maximize the benefit of the incentive.  Assistance with Allocation Letter on government projects.See Required IRS Circular 230 Disclosure 30
  31. 31. Turnkey 179D Certification Solutions  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 Energys 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.See Required IRS Circular 230 Disclosure 31
  32. 32. Contact Information Claris Energy Corporation. 55 Madison Avenue, Suite 400 Morristown, New Jersey 07960Jay Corn Steven G. NanosOffice: 973.813.1224 Office:973.813.1224Mobile: 862.266.1600 Mobile: 609.306.1326Email: Jay@ClarisEnergy.com 32 Email: Steve.Nanos@ClarisEnergy.com
  33. 33. Thank You For Your Time Required IRS Circular 230 DisclosureTo comply with requirements imposed by the Department of the Treasury, we inform you that any U.S. tax advice contained in this communication (including anyattachments) 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. 33