Commercial Green Building Tax Incentives

Concord Energy Strategies, LLC www.concordenergystrategies.com

Code Section 179D created “Energy Efficient Commercial Buildings Deduction”

•  Overview •  Benefits •  Special Rules •  Tax Matters •  Action Steps •  Other Related Opportunities

Learning Objectives

Upon completion of this course, participants will have acquired knowledge of the Energy Efficient Commercial Buildings Deduction. 1.  They will have the ability to identify buildings that qualify for the deduction,

2.  Know how to calculate the total possible tax deduction for a building,

3.  Know the time frame for when a building must have been placed in service in order to qualify for the deduction, 4. Understand what must be included in the certification used to claim the deduction, for both private and publicly owned buildings, 5. Understand how the deduction is claimed.  

Why Buildings? •  Buildings are responsible for almost half of all U.S.

energy consumption!

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Legislative History •  Energy Policy Act of 2005 (EPAct 2005)

–  Deduction effective 1/1/06 thru 12/31/07 •  Notice 2006-52 – IRS issues interim

guidance –  Later extended to 12/31/08

•  Notice 2008-40 –  Amplification of Notice 2006-52 – Deduction for

Energy Efficient Commercial Buildings •  Emergency Economic Stabilization Act of

2008 –  Extends benefits of EPAct through 12/31/2013

What is the Energy Efficient Commercial Buildings Deduction?

•  Internal Revenue Code Section 179D allows for an immediate deduction of up to $1.80/sf for “commercial buildings” that achieve a 50% reduction in total energy and power costs –  Building Envelope –  HVAC –  Interior Lighting –  Must be placed in service or retrofitted after 12/31/05 and

before 1/1/14 –  Includes residential business use if building taller than 3

stories

What is the Energy Efficient Commercial Buildings Deduction?

•  Partial deductions available in the event 50% threshold is not reached

•  Three qualifying subsystems –  HVAC = $.60 per SF –  Building Envelope = $.60 per SF –  Interior Lighting = $.60 per SF

Interim Lighting Provision •  Simpler than full modeling (just a spreadsheet) •  May qualify for deduction from $.30 - $.60 per SF, based on

reduction in lighting power density of 25% to 40% over Standard 90.1-2001 (pro-rata)

•  Bi-level switching except hotels guest rooms, store rooms, garages, restrooms and public lobbies

•  Controls in accordance with Standard 90.1-2001 •  Meet 2000 IESNA lighting handbook minimums •  Still need certifications •  Referred to as “interim” since awaiting final Regulations

from IRS

Special Rule: Government Owned Buildings •  Municipality may allocate 179D deduction to the

designer(s)

–  Designer = architect, engineer, or other professional who creates technical specifications that incorporate energy efficiency, not just the installer

–  Applicable to any new construction or retrofit on government owned property since 12/31/05

–  Municipality has discretion to allocate to primary designer or among several designers

–  CES has developed a form to be signed by representative of building owner and the lead designer/s

Allocation for Government Owned Buildings

•  In order to claim the deduction for work on government owned buildings, the designer must have the deduction, or a portion of the total deduction, allocated to them by the municipality

•  Building owner or owner’s representative must sign an allocation form, at their discretion, which allows the designer to claim the appropriate amount of the deduction

Claiming 179D Deduction •  Conduct a Section 179 D energy tax study •  Deduction amount should be included by taxpayer

under “other deductions” line on tax filings •  Taxpayer must obtain and retain the necessary

documentation and certifications to claim the deduction

•  Tax deduction must be taken in the year that the new building or retrofit was placed in service

•  Tax returns must be amended, if already filed •  Losses can be carried back / forward – special 5 year

carry back for 2008

Certification Process •  Certification required to claim 179D

deduction –  Completed by P.E. or contractor licensed in jurisdiction of

building –  Must be completed by unrelated third party –  Calculations completed using Department of Energy

approved software •  Final report, certification and supporting

documents kept with taxpayer records

Who Benefits? •  The individual/company that makes the

investment in the energy efficient building design and places either the building or retrofit in service receives the benefit for privately owned buildings –  Building owner or landlord –  Tenant/Lessee –  REITs (Real Estate Investment Trust) –  Performance Contracting Companies

•  Designers of government buildings may receive the deduction, if allocated by the governmental unit

The Study/Certification? •  Section 179D deductions have been available

since 2006 •  There is still misinformation and confusion about

both what is required to complete the Section 179 D energy studies and how to claim the deduction

•  In order to assure compliance with IRS guidelines,

all 179D modeling and certifications must follow IRS guidance exactly as prescribed

IRS says only “Qualified” Individuals can complete the Section 179D certification

•  “Qualified” in the eyes of the IRS is defined as the following:

–  Not related to the taxpayer claiming the deduction –  Is a professionally licensed engineer or contractor that is

licensed in the jurisdiction where the building is located –  The professional engineer/contractor cannot complete the

study/certification if they are related to the taxpayer as a result of having designed the building being considered for the Section 179D deduction

–  Has represented in writing to the taxpayer that he or she has the requisite qualifications to complete the certification and site visit

179 D Case Study – School System in Missouri

•  15 K-12 schools comprising a majority of a district

•  Over 1.4 million square feet

•  Installed energy efficient T8, T5 fixtures, as well as some HVAC upgrades

•  Designer was able to claim the deduction, NOT the school system

•  Designer was eligible for an almost $1 million dollar tax deduction as a result of having designed the energy-efficient systems

179 D Case Study – Office complex in Dallas

•  New construction in Dallas, TX

•  Over 500,000 square feet

•  Owners unaware of 179D

•  Energy-efficient lighting and building envelope design resulted in a nearly $1 million dollar tax deduction

•  Deduction went to the owners of the

building, since it was a privately owned commercial building

179 D Case Study – Distribution Center in Kentucky

•  Pharmaceutical distribution warehouse in Kentucky

•  Over 400,000 square feet

•  Newly constructed with an energy-efficient envelope and energy-efficient lighting system

•  Owner was able to claim over $500,000 as a federal tax deduction

Action Steps for Section 179D Energy Studies

•  Identify Good Opportunities –  Large square footages

•  50,000+ square feet ideal •  Industrial Facilities •  Chain facilities with multiple locations

–  LEED certified buildings –  High Energy Star rating –  Energy efficient retrofits –  Sooner the opportunity is identified, greater chance to

maximize tax benefit with design changes

Revenue Procedure 2011-14

•  IRS Revenue Procedure 2011-14 allows certain taxpayers to claim 179D deduction for open (prior three years) and closed tax years without filing amended returns

•  Rev. Proc. 2011-14 deals with automatic consent for a change in accounting method

•  Taxpayers file a Form 3115, Application for Change in Accounting Method, along with required Section 179D certification (along with allocation for municipal projects)

•  Opportunity to capture the 179D deductions for all project years applicable to Section 179D. Projects placed in service since 1/1/2006

Process •  Opportunity Identified •  Allocation Letter signed for government

owned buildings •  DOE approved modeling completed •  Site Visit completed by the PE or licensed

contractor •  Certification •  Final Report •  Consultation with tax counsel if needed to

discuss how to claim deduction

This concludes The American Institute of Architects Continuing Education Systems Program

education@concordenergystrategies.com

888.897.5445

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