Included in the Emergency Economic Stabilization Act placed into law last month was a five year extension of the Energy Efficient Commercial Building Tax Deduction. Previously introduced as part of the Energy Policy Act (EPACT) of 2005, this tax deduction was designed to encourage building professionals to invest in interior lighting, HVAC/hot water, and building envelope systems identified as being able to reduce energy costs in their new or renovated facilities.
When originally passed in 2005, the tax deduction was scheduled to expire on December 31, 2008. But with the extension of the deduction (now set to end on December 31, 2013), the window of opportunity has widened for those interested in increasing their energy efficiency and reducing energy costs, while also gaining a tax advantage.
The parameters set in 2005 offered organizations a tax deduction of up to $1.80 per square foot in structures built or renovated with strategies certified to reduce annual energy costs by at least 50% (compared to a “reference building” that meets the minimum requirements of ASHRAE Standard 90.1-2001).
If a project team did not choose to pursue strategies for all three eligible areas (lighting, HVAC/hot water, and building envelope), it could pursue a partial deduction of up to 60¢ per square foot for improvements made to one (or two) of those systems. For this scenario, certification would be required stating that the individual system (e.g., lighting) is expected to reduce energy costs by 16 2⁄3%, compared to a Standard 90.1-2001 reference building. (That figure represents about a third of the 50% reduction that is required when all three systems are involved.)
While the 50% reduction threshold remains a requirement for those pursuing the full $1.80 per square foot deduction, changes were made in June 2008 to the partial thresholds. Now, those partial targets are as follows: interior lighting, 20% reduction; HVAC/hot water systems, 20% reduction; and building envelope measures, 10% reduction.
In order to claim the tax deduction, the organization must obtain certification of expected savings from an engineer or contractor licensed in the jurisdiction where the building is located. Inspections are performed to meet guidelines set by the National Renewable Energy Laboratory (NREL). Determining if a system, or systems, will deliver the required energy efficiency mandates energy modeling to be performed. To do this, a qualified engineer or contractor can choose from nine software programs designated as acceptable by the U.S. Department of Energy.
SourceCorp Professional Services, a Fort Worth TX-based firm specializing in accounting and tax services, has worked with commercial owners and managers since the tax deduction was introduced in 2005. The firm also employs engineers who can certify the building systems.
Matt Rader, director of green building and cost segregation services at SourceCorp, explains that a project usually involves working with contractors, the organization’s finance department, and the facility management (FM) team. In describing the “typical” process, he says, “Generally, we begin by sending a one page questionnaire to the project team. We seek to learn the scope of work and include queries on square footage, when the building was (or is expected to be) placed in service, and costs/budgets. We also ask if the project is going for LEED certification. If so, we request a copy of the application to see the points being pursued.”
The project team is also asked to provide drawings and specifications, explains Rader, along with submittals that arise during construction.
Rader’s colleague, Chris Henderson, CPA, director of operations at SourceCorp, notes that the design of the lighting system often serves as an indicator of the chances for successfully garnering the tax deduction. “Lighting is a bellwether in the process,” he says. “If that system does not qualify, it’s often the case that the other systems will not qualify.”
In commentary on the tax deduction, the U.S. Environmental Protection Agency (EPA) has also stated that interior lighting can be the most straightforward system through which to pursue the deduction. This is because lighting upgrades are not only relatively cost-effective, according to EPA, but also because less heat is generated from efficient lighting systems, which in turn affects the proper sizing of the heating and cooling systems.
The extension of the deduction also provides an opportunity for recently completed projects. As with the 2005 version, the latest legislation allows for “look back studies” encompassing projects completed in 2006, 2007, and 2008. “If a building is constructed in those years, we can look at them for the tax deduction,” says Rader. “In essence, the process will be the same as for a new project.”
Adds Henderson, “In the case of an already operational building placed in service in a prior year, the organization receives the tax deduction through an amended return.”
It is important to know that the tax deduction treats publicly owned facilities differently than private ones. Since public facilities are not subject to federal taxes, those entities cannot take the deduction. The legislation directs that the project designer can take the deduction for his or her firm. The public organization names who will be able to take the deduction, based on which designer is responsible for the building system, or systems, in question. Where several design firms have fairly equal part, the benefit can be divided among those parties.
Facility professionals have gained more time to access the commercial building tax deduction. Pursuing the benefit will result in a greener building along with a “greener” tax return for the organization.
Research for this article included information from the Internal Revenue Service and an interview with Henderson and Rader. Answers to a list of frequently asked questions are provided by the Commercial Building Tax Deduction Coalition, convened by the National Electrical Manufacturers Association (NEMA).