While many know that there are significant tax incentives to green building, most don't realize how many incentives there are, to what they apply, and the substantial amount they can save when taking full advantage of these incentives. In fact, many designers don't realize that they benefit directly from these incentives and that they can generate substantial refund opportunities for their firms. They can use these incentives to close more business and complete more projects.
There are many benefits of being energy-efficient and green in your building designs. There are the "superficial" benefits, i.e., goodwill for a brand, ability to incorporate specialized branding into a marketing strategy, etc. And there's the cost savings from less waste, energy-cost reductions, and recycling. These are the typical things most businesses think about when attempting to be more environmentally friendly. However, most don't stop to think that upgrading their facilities can result in significant tax savings.
One example of an underutilized tax credit involves an architect who designs a building for any public entity, such as a school, county, or city. Most don't realize that the architect themselves can take the tax deduction. As public entities pay no taxes, this allows the benefits to be "gifted" to the building designer. The benefits to the firm can be both substantial and dramatic. The tax deduction accrues to the firm itself, and for an "S" corporation, the deductions can be passed through directly to the partners. Since the EPAct tax deduction is not subject to AMT limitations, the partners benefit directly and can carry forward their unused deductions for up to 25 years. It is important to note that there are specific strategies to benefit both "C" and "S" corporations in order to maximize their tax benefits; you just have to take the time to learn the nuances or find the appropriate assistance to help navigate these tax laws.
Another tax incentive that requires stringent certification is the 179D Federal Energy Tax Deduction. This deduction allows businesses to get a credit for creating an energy-efficient property that reduces by 50 percent the total annual energy and power costs with respect to interior lighting, heating, cooling, ventilation, and hot water systems. If the reduction does not meet this threshold, the business can take partial deductions. Energy simulation studies are required to justify the deduction, and inspection and testing must be completed by a qualified engineer or contractor registered in the jurisdiction.
The nuances of 179D are, quite honestly, somewhat convoluted and require a trained eye to understand the specifics and qualifiers. The basics of the incentive are as follows:
- Maximum deduction: $1.80/square foot as long as 50 percent reduction in total costs is achieved, up to the cost of the equipment placed during that taxable year
- Partial deductions: $0.60/square foot for 16 2/3 percent reduction for building envelope, HVAC, and service hot water systems and lighting; $0.30/square feet for 25-40 percent reduction in lighting power density (50 percent for warehouses)
- Qualifying buildings: Commercial buildings (any size), for-lease apartments (minimum of four stories), commercial energy renovations
- Deduction recipient: Building owner at time of improvements; for public buildings, owner may allocate the deduction to the designer for that taxable year
- Eligibility dates: Building completed or renovated between Jan. 1, 2006 and Jan. 1, 2013
In order to receive the incentives, it is not enough for a firm to simply do the work and report it. Because of the potential significant tax savings, the IRS requires that the work be professionally reviewed and documented as having met the minimum required standards for either Title 24 of the California Building Energy Efficiency Standards or those of the International Energy Conservation Code (IECC) that is followed throughout the rest of the United States. It's recommended that you seek out a specialized accounting team that will work closely with the IRS to ensure that all certification standards are clearly communicated to the design team and are met during the building or upgrade process. It is important to make sure you're keeping current with all the certification paperwork required for documentation so you can receive all available tax credits.
The savings can be enormous, and the new equipment costs are often immediately offset by the tax incentives. In addition, the long-term effects are equally great. With the new equipment installed, energy costs will be reduced, resulting in lower bills. By utilizing a firm that specializes in this area of the tax code during your building phase and any design upgrades, you can potentially find more tax benefits than you thought possible.
How much can be saved? It is best illustrated by this example: In a 250,000-square-foot industrial facility, the cost of relighting the entire building was $200,000. The EPAct benefits were $150,000 in tax deductions; the abandonment was another $115,000 in deductions. Some $265,000 in federal tax deductions ($89,600 after tax benefits) were made available for this property owner. Now, add in the utility rebate (an additional $60,000) and the energy savings ($55,000 a year), and you have a project with a net positive cash flow in the first year. In essence, the lighting retrofit was free, funded in part by the tax benefits, and the property owner now saves an additional $55,000 a year in energy costs, this year and every year thereafter.