Energy Incentive Programs: Good for the Earth and the Bottom Line (Part 1 of 2)

This article originally appeared in the March 2017 TaxStringer and is reprinted with permission from the New York State Society of Certified Public Accountants.

Improvements in interior lighting are the easiest to document for 179D deductionsThese days, people talk a lot about “going green.” Companies promote environmentally conscious programs and policies to win new customers, improve public image, and reduce costs. Indeed, energy incentive programs may confer tremendous tax savings. There are a number of programs at both the federal and state levels that allow commercial real estate owners to increase their cash flow while decreasing their carbon footprint.

The federal government has four major initiatives available to the environmentally conscious property owner. The star of the show is a powerful deduction benefit colloquially referred to as “EPAct 179D,” or simply “179D.” The Energy-Efficient Commercial Buildings Tax Deduction (IRC section 179D, enacted by Section 1331 of the Energy Policy Act of 2005), incentivizes energy-efficient construction for newly constructed and recently renovated commercial buildings. EPAct 179D allows taxpayers to accelerate depreciation of qualified energy-efficient commercial building property placed in service after Dec. 31, 2005 and before Jan.1, 2017. This is a one-time deduction benefit, and while it is best claimed in the year of construction, it can be claimed retroactively using a 3115 Change in Accounting Method.

A 179D deduction of up to $1.80 per square foot is available for the cost of developing energy-efficient property. This is achieved by qualifying for a deduction of up to $0.60 per square foot in three key areas: interior lighting, HVAC, and building envelope. The deduction is based on total building square footage but cannot exceed the cost of the energy-efficient improvements. Clearly, the best candidates are the largest candidates, and properties like hotels, retail facilities, warehouses, trucking terminals, and industrial facilities are all excellent choices.

In order to claim a 179D deduction, a taxpayer must be able to document the reduction in energy consumption generated by the improvements. Reduction in consumption is compared to a set benchmark determined by the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE). Projects completed prior to Dec. 31, 2015 must be able to demonstrate at least a 50% improvement in efficiency in comparison to ASHRAE Standard 90.1-2004. Projects completed after Jan. 1, 2016 are compared to a slightly higher standard, ASHRAE Standard 90.1-2007. Improvements in interior lighting are the easiest to document—a simple spreadsheet enough to do the trick. Often, retrofits involving LED lighting are efficient enough to qualify for the 179D deduction on their own. Taxpayers who also wish to document improvements in HVAC or building envelope will need to submit a more thorough document, however, including building modeling using software approved by the Department of Energy. Buildings that qualify for the 179D deduction must be inspected and certified by a professional contractor or engineer who is based in the same jurisdiction as the property. The third-party inspector must be completely independent of the property owner, with no personal interest in any potential tax savings that may result.

Many people don’t realize that the 179D deduction can also be claimed on tax-exempt entities. When schools, municipalities, and governments implement qualified improvements, the deduction may be claimed by the primary designer, architect, or engineer. This is a tremendous windfall for a designer. First, buildings of this nature tend to be quite large, resulting in a larger deduction. Second, whereas a property owner would have to reduce his basis by the amount of the credit, the designer has to do no such thing: The asset isn’t on his books at all, so there’s nothing to reduce. The designer gets all the benefit of the deduction, with none of the drawbacks of basis reduction.

179D deductions are just the tip of the iceberg.  In Part Two of this blog, we’ll discuss a number of other powerful initiatives.  If you just can’t wait, or would like to learn more about how you might benefit from these incentives, please contact us at 215.885.7510 or click here.