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179D Tax Break for Energy Efficient Buildings

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Section 179D Tax Deduction of the IRS Code allows federal deductions for the installation of energy efficiencies in real property.

Published in: Economy & Finance
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179D Tax Break for Energy Efficient Buildings

  1. 1. Energy Policy Act 2005 IRC § 179D Tax Deductions for owners of Energy Efficient Buildings
  2. 2. IRC § 179D - WHAT IS IT?  An IRS Code section that allows for a federal deduction for the installation of energy efficiencies in real property. Effective dates from 1.1.2006 through 12.31.2014.  Energy efficiencies are considered to be: Lighting, HVAC (including Water Heater), Envelope or all of these as “Whole Building”. The deduction for each is $.60/square foot for: Lighting, HVAC and Envelope or $1.80/square for Whole Building
  3. 3. WHAT MAY QUALIFY?  Commercial properties for retrofit, improvements, new construction or tenant-owned assets – owners of the assets may take the deductions.  Public buildings (government: federal, state, county, municipal, etc..) which have implemented energy efficiencies while tax exempt may “Allocate” the deduction to the “primary designer(s)” Architects, Lighting Designers and Mechanical Engineers.
  4. 4. Qualifying Projects  Is the project placed in service between 2006 and 2014?  Is the project installed in the U.S. or its territories?  Is the project within the scope of ASHRAE Standard 90.1-2001, which includes new construction and renovations for commercial buildings or high- rise residential buildings
  5. 5. WHAT DOES NOT QUALIFY: Not-for-profits (501(c) corporations) Sovereign nations
  6. 6. STATUS OF PROPERTY/ASSET OWNER? 1.Usually anticipating a tax liability – or has a tax liability. The deduction may be carried forward. 2. Has paid taxes in the year in which the construction/retrofit/improvement was put into service. In this case the tax benefit may be applied to current or future tax liability or refunded by the IRS
  7. 7. CATCH UP SINCE 2006? The IRS allows the private sector owner of the assets to go back in time (even though the years may be considered “closed” tax years) to 1.1.2006 to “catch up” on the missed deductions. This is completed via a “Change in Method of Accounting” IRS Form 3115. No tax return amendment is necessary, but is available for open years.
  8. 8. BENEFIT ANALYSIS?  Lighting as a stand-alone (Interim Rule): Analysis determines whether the watts per square foot and the necessary controls are present.  HVAC or Envelope or Whole Building: Engineering analysis (modeling using IRS required, DOE approved software) to determine which system(s) qualify for federal deductions.
  9. 9. What is needed for a Benefit Analysis  Lighting Only:  Square footage of proposed/installed project  Specific usage of the property  Number of fixtures of proposed/installed project  Watts per fixture of proposed/installed project  Cost of the proposed/installed project  Amount of rebate  Date of proposed/installed project
  10. 10. Envelope/HVAC/Whole Building:  Square footage of proposed/installed project  Plans/drawings of the project  Submittals and specifications  Date the project/retrofit/improvements were put in service  Cost of the project
  11. 11. PROCESS?  Discussion with client or client’s representative regarding the scope of the project.  Discussion between client’s tax advisor and Jordan Taylor, CPA – CRG National Tax Director to insure that client may take and use the deduction.  For LIGHTING ONLY – determination that the project qualifies then… Agreement/Contract.  For HVAC/ENVELOPE/WHOLE BUILDING – Letter of Intent (insures property qualifies with no cost to client should the property fail to meet requirements).
  12. 12. PROCESS?  CRG engineering group models (HVAC/ENVELOPE/Whole BUILDING).  Once qualification for system(s) an agreement is authorized and deposit is submitted.  Site visit is arranged (every site must be visited – per IRS).  Once site visit is completed – documentation is reviewed by CRG.  Assembly of Report for client.  Report undergoes engineering and accounting quality review.  Report is assembled and delivered to client and designees (typically tax advisor).
  13. 13. Benefit Illustration The owner of a warehouse facility of 130,000 square feet in New York replaced the HVAC and lighting systems throughout the building. The old systems were twenty years old and were no longer reliable or performing properly, in addition, the owners wanted to improve efficiencies The cost of replacement for both systems was $423,000 The existing HVAC system was a roof installation and the lighting system was a metal halide system. The new roof top HVAC system was increased efficiency and the LED lighting system reduced energy costs.
  14. 14. Challenges  To install systems that would improve efficiencies, reliability, and lower energy consumption.  To determine the incentives available to enhance ROI.  To Capitalize on all tax opportunities associated with energy efficiencies.
  15. 15. Solution The local utility provided a cash incentive to the owner to help pay for the cost of the new systems. CRG provided baseline qualification analysis of the proposed the HVAC system and lighting systems that indicated they were eligible for potential tax deductions based on energy efficiency through §179D of EPAct. §179D allows for a $.60/square foot deduction for deduction for each of the HVAC and Lighting systems when ASHRAE Standard 90.1-2001 is exceeded by specific percentages
  16. 16. Results Based on the information provided by the manufacturers of the HVAC and Lighting systems to the warehouse owner, the warehouse owner attained an efficient and reliable HVAC and lighting systems that required less maintenance and was able to take the full deduction amounting to $1.20 per sf totaling $156,000 in addition to the local incentives
  17. 17. Additional Benefit Because the HVAC and Lighting systems were not fully depreciated. CRG determined the remaining un depreciated value of the systems. As a result, the owner of the building was able to take an additional $78,000 in tax deductions via the Tangible Property Regulations when the new systems were installed
  18. 18. Thank You! For a “pro bono” benefit analysis of your energy efficient retrofits, improvements or new construction contact: Rich Maiolo - Direct 860.485.8589 Email: richm@capitalreviewgroup.com

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