What You Need to Know about the Energy Policy Act – Section 179D Tax Deductions
Have you recently done energy efficiency upgrades, or are you planning to do some this year? If so, are you aware of the EPAct, section 179D tax deduction and how it can possibly save you hundreds of thousands of dollars? As a hospitality resource, it is important to EcoGreenHotel to provide education on the ways to reduce energy and the payback period for your hotels across the country. The savings gained from energy efficiency projects can be found “above and below the line” on one’s annual P&L statement. EPAct is one of those “below the line” savings. EcoGreenHotel has strived to maximize the realized savings for its clients. It would be our pleasure to share with you this piece of the puzzle in order to better educate those seeking additional savings from their efficiency upgrades.
The next time someone brings up “EPAct”, Section 179D, or The Energy Policy Act, don’t stick your head in the sand. Here’s everything you need to know about the tax deduction that became available over six years ago under the Energy Policy Act of 2005. As of right now, EPAct is set to expire January 2013 – therefore the time to act is now to take advantage of these deductions!
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WHO GETS IT?
If you own a commercial building like a green hotel that was built (or substantially renovated) after January 1, 2006, you’ve got a property that may be a candidate.
WHAT IS THE BENEFIT?
Up to $1.80 per square foot. That may not sound like a big number, but for a hotel owner in Florida that recently took advantage of it, it will mean $1.3 million dollars in tax deductions for their tax year. Generally, buildings certified in the 60,000 to 120,000 square foot range, can expect to see results between $100,000 and $200,000 per building.
WHAT QUALIFIES?
To take advantage of this benefit, your new construction or renovations made to the hotel in the areas of lighting, HVAC or the envelope has to go into service (use) after January 1, 2006, it also has to be energy efficient. The energy efficiency standard is simple to state but describing the process of how it is proven is complicated and best left to experts in the field. Simply stated, your new building or the renovations, must be designed to use at least 50% LESS energy than a 2001 ASHRAE baseline.
HOW DO YOU TAKE ADVANTAGE OF IT?
In order to obtain the benefits of this tax deduction, you need to obtain the certification of a licensed, third party. The party certifying must use approved software and demonstrate that the building’s envelope (walls, roof, windows), lighting and HVAC systems are designed to use at least 50% less energy than the 2001 ASHRAE 90.1 standard. This is a standard set forth by the American Society of Heating, Refrigerating and Air-Conditioning Engineers and the software modeling is used to create two models. One model is the hotel or building as designed and the other is the hotel or building if designed pursuant to the 2001 standard. The models are compared to see if your building makes the grade. If if does, you can qualify for up to $1.80 per square foot in deductions.
CAN YOU GET PARTIAL DEDUCTIONS?
Yes. If the hotel or building does not meet the 50% standard, each of the systems being reviewed can be qualified separately (HVAC, Envelope and Lighting) for up $.60 per square foot. The building’s lighting as a separate qualification can qualify partially for between $.30 and $.60 per square foot.
IS AN INSPECTION REQUIRED?
Yes. Believe it or not, the IRS does require that there be a third party verification of the existence of the hotel or building and that it is built to the specifications that were modeled for energy efficiency.
DOES A TAXPAYER NEED TO FILE A REPORT WITH THEIR TAX RETURN?
No. But the engineering report that substantiates the tax deduction should be kept on file in case of an audit. If done properly, the report can be a hundred pages or more.
HOW IS THIS TREATED FOR GOVERNMENT PROJECTS?
The tax deductions under the Energy Policy Act are primarily intended to benefit the owner of a commercial property. However, the statute’s intent to incentivize “green” building by giving this tax deduction, is not able to be realized in cases where the owner of the property is a federal, state or local government. Likewise, entities that do not pay federal taxes makes this deduction essentially worthless to them. The statute allows the deduction in those cases, to be allocated to the DESIGNER of the building instead. The “designer” can be the architect, an engineer, or any other party responsible for the energy efficient design.
Architects need to obtain a third party study of the energy efficiency of the building in question as an owner would do, but they also need to obtain an allocation of the benefit from the owner as part of their audit trail. Naturally, the IRS needs to confirm, in the event of an audit, that this particular designer was in fact responsible for the energy efficient design. Placing the responsibility for verifying that in the hands of owner makes sense, but the language of the statute with regard to the allocation of 179D benefits to the designer by the owner of the energy efficient building, has been less than perfect.
WHEN DO YOU CLAIM IT?
Ideally, the tax deduction is taken in the year in which the property is “placed in service” or opens for business. This is typically the date of a temporary certificate of occupancy but it can vary. So, for example, a new hotel opens up in 2011, no matter how long the design or construction process took, would give rise to a tax deduction against 2011 income. You can take it on your tax return when filing your 2009 tax return, amend your return for up to three tax periods and receive a refund overpayment or go all the way back to 2006 and have your CPA catch it all up with a 3115 form now that the IRS brought out Revenue Procedure 2011-14 in January of 2011.
IS IT A “CREDIT” OR A DEDUCTION?
It is a tax deduction, which means that the “cash value” of it is different than if it were a credit. Tax “credits” reduce each dollar of tax you pay, whereas tax “deductions” are worth the dollar amount of the deduction, multiplied times your marginal tax rate. So if you are entitled to a deduction of $100,000 in a year when you are paying taxes at a rate of 35%, the value of that tax deduction to you is $35,000.
DOES IT REDUCE BASIS?
Yes. Owners who take the deduction also must reduce their basis in the building asset.
WHAT IS THE COST OF CERTIFICATION?
Generally, a study can be done at a cost that equates to less than 10% of the amount of your tax deduction or less. Beware of companies that get paid on a contingency. You may be overpaying and the IRS may question the independence of the study. After all, if the company gets paid more if they qualify more, their results may be open to conflict. Companies that charge a set fee by the square foot will not raise this red flag.
EcoGreenHotel’s engineering resource specializes in working with hoteliers to assist them in maximizing their tax savings in the niche’ specialty tax services like energy tax Section 179D studies, cost segregation and R & D Tax Credits.
If you have a specific question about any of these studies please contact EcoGreenHotel.
EcoGreenHotel is hosting an online webinar discussing this very topic free of charge! The webinar is scheduled for February 9th, 2012 at 2:00 PM EST via gotomeeting.com. Click to sign up!
About EcoGreenHotel
EcoGreenHotel LLC (Knoxville, TN), is a privately held company dedicated to helping lodging facilities address a broad spectrum of sustainability issues. The company provides information, tools, checklists, current news and trends to the hospitality industry through its website, www.EcoGreenHotel.com. The company also runs an online marketplace for green products and services at www.EcoGreenHotelStore.com. In addition to the online offerings, EcoGreenHotel provides customized consulting services tailored to the needs of the hospitality industry in the areas of energy efficiency and certifications, including LEED, Green Seal and Energy Star. For those properties that have reached certified levels of sustainability, EcoGreenHotel assists with marketing services to position the properties within the growing “green” space and enhance revenue. For further information, email info@EcoGreenHotel.com or call 888-229-0213.
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