The Energy Policy Act of 2005 (EPACT) is one of the most comprehensive and sweeping energy legislation packages ever passed. Signed into law by President George W. Bush on August 8th, 2005, the bill authorized massive tax benefits, reductions and deductions, plus loan guarantees in an effort to spur action on a new energy policy.
Buried among these voluminous new initiatives now part of the IRS Tax Code, was the new Deduction of Energy Efficient Buildings granted under Title 26, now known simply as Section 179D. Specifically, Section 179D offers substantial tax benefits to commercial property owners to upgrade their buildings and make them more energy efficient. The legislation was targeted to expire in 2008, however, the American Reinvestment and Recovery Act of 2009 extended the benefits of this bill through 2013. Perhaps due to the enormity of the legislative package, or a lack of understanding, the IRS reports that less than 2% of all commercial property owners have taken advantage of this tax saving opportunity.
There are special rules for government owned buildings, wherein the tax benefits may be transferred to a project manager or architect, but for purposes of this article, we will focus on how banks, as building owners and leaseholders, can leverage these benefits.
About the Actual Deduction
Under Section 179D, deductions are based on areas of energy savings and total square footage of a building. The regulation provides commercial building owners and leaseholders with a deduction for implementing energy-efficient commercial building property in their buildings between December 31, 2005, and January 1, 2013. The deduction is available whether the respective space is new construction or already existing and applies to the year in which the energy-saving property was made ready for its intended use. It is divided into three categories:
- Lighting
- HVAC & hot water
- Building Envelope
The maximum deduction of $1.80 per square foot requires a 50% reduction in total annual energy and power costs (compared to a reference building that meets the minimum requirements of American Standard of Heating, Refrigeration and Air Conditioning Engineers (ASHRAE) 90.1-2001), not to exceed the amount equal to the cost of energy efficient commercial property placed in service during the taxable year. A partial deduction of $.60 per square foot requires a 16 2/3% reduction in energy consumption, and can be achieved through improvements in one of the previous 3 categories (Lighting, HVAC, Building Envelope). With recent technological advances in lighting, as well as the generally lower costs compared to the other categories, this deduction is considered the “lowest hanging fruit”. A partial deduction for Interim Lighting affords the bank a deduction between $.30 - .60 per square foot and requires a 25 – 40% reduction in lighting power density (50% in the case of warehouses). As many banks have multiple branches, and this is a per building incentive, the deductions can be quite substantial.
To summarize:
Improvements can be made in three categories
- Lighting
- HVAC
- Building Envelope
- Each can achieve a $0.60 deduction per sq. ft.
- Lighting is considered the “low hanging fruit” due to rapid ROI and lower upfront costs
Three Year “LookBack”
What about banks which may have already made significant investments in energy upgrades? Fortunately, the IRS rules allow banks to take deductions on qualified upgrades completed during the 3 prior tax years. For qualifying institutions, this is simply found money.
Certification of Qualified Property
To insure receipt of expected credits, the taxpaying entity must certify the property meets all energy-conservation claims, and establish the total annual energy savings required for obtaining a partial deduction. The guidelines provide information about the software programs that must be used in calculating these power and energy expenditures.
Additionally, the property must be certified as an energy-efficient commercial building property by a qualified individual. These individuals may not be related to the taxpayer and must be an engineer or contractor properly licensed in the jurisdiction where the building(s) is/are located. The certification need not be attached to the tax return, but Section 1.6001-1(a) of the IRS regulations state that taxpayers are required to maintain books and records that would satisfy investigation into the applicability of the deduction.
Note: The preceding article is not legal nor accounting advice and should not be relied upon without the advice and guidance of a professional Tax Advisor familiar with all relevant facts. It is always highly recommended that you consult with your own attorney and accountant regarding any IRS Tax Code issues.
Joseph Winn is the President of GreenProfit Solutions, Inc. a sustainability consulting, certifying and contracting firm. For more information, please contact Joseph at 1-800-358-2901 or email jwinn@greenprofitsolutions.com.