§179D May Sunset in 2013

Summary:  Although §179D of the IRS code expires at the end of 2013, opportunities exist in two areas: accelerating future projects into 2013 and reviewing projects dating back to January 1, 2006 that resulted in energy savings.  Either of these can allow the building owner, occupant, or designer to qualify for the deduction.

Worried that 2013 will be the end of your ability to deduct energy improvement investments under §179D of the Internal Revenue Code?  Fear not!  While energy efficiency upgrades need to be completed by December 31, 2013, the window for utilizing this deduction extends back to January 1, 2006.  As we head into tax season, it can be beneficial to review past energy projects and see if they may qualify for the §179D deductions.

§179D of the Internal Revenue Code supporting the Energy Policy Act of 2005 is one incentive that may provide major benefits to building owners, designers and contractors.  §179D includes full and partial tax deductions for investing in commercial building improvements that are designed to increase the efficiency of energy-consuming functions such as lighting, HVAC, and building envelope.  The deduction available is up to $.60 per square foot for each: lighting, HVAC, and building envelope – a potential for $1.80 per square foot if all three components/subsystems qualify.  The following factors need be taken into consideration:  1. Can the building owner take the deduction?  2. Does the project qualify?

There are several strategies that can be employed to take advantage of the §179D deduction.  First, it is important to understand that projects must be completed by December 31, 2013.  Building owners and operators planning on energy efficiency projects in 2014 and beyond should assess accelerating those projects into 2013 to take advantage of the deduction available. Accelerating projects into 2013 will qualify for the deduction and will also generate additional operational savings for the additional years they are in service.  This deduction may be taken on renovations/retrofits to existing buildings as well as new construction.  The act requires a reduction in annual energy and power consumption per subsystem to the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) Standard 90.1-2001.

Now is the time to review past projects that resulted in energy savings to determine if they are eligible for the deduction.  The act specifies when the project must be completed, not when the deduction has to be taken.  Even after the sunset of §179D at the end of 2013, projects completed within the window are eligible.

Discussions on the tax code and its application are not something the average person enjoys, but this should not deter the building owner, occupants, architectural/design firms or builders.  The organizations that provide certification should be skilled in tax and engineering to understand and apply the requirements and application of §179D and to assist the owner, operator, or designer in navigating the process for both anticipated projects and past projects.

Don’t let §179D benefits expire without taking advantage of the allowable deduction for energy saving projects.  Consider accelerating future projects into 2013 to take advantage of the benefit.  Review projects completed since January 1, 2006 for opportunities to take advantage of the deduction.  Energy improvements may have resulted from a renovation that improved lighting and/or cooling efficiency, an upgrade to mechanical equipment as part of a maintenance program, and/or improvements to the building envelope.  Each of these, lighting, HVAC and building envelope, may meet the requirements for the $.60 per square foot deduction and/or for the total of $1.80 if all three areas show qualified improvements.  Contact Capital Review Group in assessing and applying §179D to potential past and planned projects.  CRG can guide you or your organization through the process and assist in the third party certification of projects.

About the author:  Wayne Haggstrom is a technical writer for Capital Review Group in Phoenix, Arizona.  He has over 25 years experience in construction, facilities operations and maintenance, and technology implementation.  He is a Certified Sustainable Building Advisor (CSBA) and a Certified Six Sigma Black Belt.

Source: Thomson Reuters  

The American Taxpayer Relief Act extends (and in some cases modifies) a number of depreciation breaks, including (1) increased Section 179 expensing limitations and treatment of certain real property as eligible Section 179 property; (2) 50% bonus depreciation; and (3) 15-year straight line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.

Under pre-2012 Taxpayer Relief Act law (pre-Act law), the Code Sec. 168(k) additional first-year depreciation deduction (also called bonus first-year depreciation) generally is allowed equal to 50% of the adjusted basis of qualified property acquired and placed in service after Dec. 31, 2011, and before Jan. 1, 2013 (before Jan. 1, 2014 for certain longer-lived and transportation property). The additional first-year depreciation deduction is allowed for both regular tax and alternative minimum tax (AMT) purposes, but is not allowed for purposes of computing earnings and profits. The basis of the property and the depreciation allowances in the year of purchase and later years are appropriately adjusted to reflect the additional first-year depreciation deduction. A taxpayer may elect out of additional first-year depreciation for any class of property for any tax year.

In general, an asset qualifies for the bonus depreciation allowance if:

… It falls into one of the following categories: property to which the modified accelerated cost recovery system (MACRS) rules apply with a recovery period of 20 years or less; computer software other than computer software covered by Code Sec. 197; qualified leasehold improvement property; or certain water utility property.

… It is placed in service before Jan. 1, 2013. (Certain long-production-period property and certain transportation property may be placed in service before Jan. 1, 2014)

… Its original use commences with the taxpayer. Original use is the first use to which the property is put, whether or not that use corresponds to the taxpayer’s use of the property.

New law. The 2012 Taxpayer Relief Act extends 50% first-year bonus depreciation so that it applies to qualified property acquired and placed in service before Jan. 1, 2014 (before Jan. 1, 2015 for certain longer-lived and transportation property). (Code Sec. 168(k)(2), as amended by Act Sec. 331(a)) A conforming change is made to Code Sec. 460(c)(6)(B) (relating to 50% bonus depreciation not being taken into account as a cost in applying the percentage of completion method for certain long-term contracts).

15-Year Writeoff for Qualified Leasehold and Retail Improvements and Restaurant Property Reinstated and Extended

Under pre-Act law, qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property that was placed in service before 2012 was included in the 15-year MACRS class for depreciation purposes—that is, such property was depreciated over 15 years under MACRS.

New law. The 2012 Taxpayer Relief Act retroactively extends for two years the inclusion of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property in the 15-year MACRS class. Such property qualifies for 15-year recovery if it is placed in service before Jan. 1, 2014. (Code Sec. 168(e)(3)(E), and Code Sec. 168(e)(8)(E), as amended by Act Sec. 311)

Taking advantage of Bonus Depreciation and/or utilizing Qualified Improvements could have a major effect on your bottom line.  Capital Review Group can assist you in creating a strategy for obtaining the equipment or other assets that will enhance your business, while taking advantage of generous tax deductions, improving cash flow and increasing profits.

Good News from the AIA to share!

Architecture Billings Index Positive for Third Straight Month

All regions reporting positive business conditions

Contact: Scott Frank
sfrank@aia.org

For immediate release:
Washington, D.C. – November 21, 2012 – Billings at architecture firms accelerated to their strongest pace of growth since December 2010. As a leading economic indicator of construction activity, the Architecture Billings Index (ABI) reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the October ABI score was 52.8, up from the mark of 51.6 in September. This score reflects an increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 59.4, compared to a mark of 57.3 the previous month.

“With three straight monthly gains – and the past two being quite strong – it’s beginning to look like demand for design services has turned the corner,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “With 2012 winding down on an upnote, and with the national elections finally behind us, there is a general sense of optimism. However, this is balanced by a tremendous amount of anxiety and uncertainty in the marketplace, which likely means that we’ll have a few more bumps before we enter a full-blown expansion.”

Key October ABI highlights:

• Regional averages: South (52.8), Northeast (52.6), West (51.8), Midwest (50.8)

• Sector index breakdown: multi-family residential (59.6), mixed practice (52.4), institutional (51.4), commercial / industrial (48.0)

• Project inquiries index: 59.4

The regional and sector categories are calculated as a 3-month moving average, whereas the index and inquiries are monthly numbers.

About the AIA Architecture Billings Index
The Architecture Billings Index (ABI), produced by the AIA Economics & Market Research Group, is a leading economic indicator that provides an approximately nine to twelve month glimpse into the future of nonresidential construction spending activity. The diffusion indexes contained in the full report are derived from a monthly “Work-on-the-Boards” survey that is sent to a panel of AIA member-owned firms. Participants are asked whether their billings increased, decreased, or stayed the same in the month that just ended as compared to the prior month, and the results are then compiled into the ABI.  These monthly results are also seasonally adjusted to allow for comparison to prior months. The monthly ABI index scores are centered around 50, with scores above 50 indicating an aggregate increase in billings, and scores below 50 indicating a decline. The regional and sector data are formulated using a three-month moving average. More information on the ABI and the analysis of its relationship to construction activity can be found in the White Paper Architecture Billings as a Leading Indicator of Construction: Analysis of the Relationship Between a Billings Index and Construction Spending on the AIA web site.

About The American Institute of Architects
For over 150 years, members of the American Institute of Architects have worked with each other and their communities to create more valuable, healthy, secure, and sustainable buildings and cityscapes. Members adhere to a code of ethics and professional conduct to ensure the highest standards in professional practice. Embracing their responsibility to serve society, AIA members engage civic and government leaders and the public in helping find needed solutions to pressing issues facing our communities, institutions, nation and world. Visit www.aia.org.

By Capital Review Group

With the introduction of the “Commercial Building Modernization Act” (S. 3591), Senators Cardin (D- MD), Snowe (R-ME), Bingaman (D- NM), and Feinstein (D-CA) are leading the way to extend and simplify the §179D tax deduction targeted at improving the energy efficiency of existing buildings as well as new construction.  This bill was assigned to a congressional committee on September 20, 2012, which will consider it before possibly sending it on to the House or Senate as a whole. The bill will extend the §179D deduction, scheduled to expire at the end of 2013, through the end of 2016.  The Commercial Building Modernization Act (CMBA) proposes several improvements to the original legislation that will improve the effectiveness of §179D and simplify its application.  CMBA recommended improvements include measuring energy savings and improvements against the existing building’s own consumption baseline prior to the retrofit, linking the amount of the deduction to the savings achieved, and making the §179D deduction available for a broader range of real estate owners.  These changes should make it attractive to complete energy efficiency projects on existing buildings as well as level the playing field for all building owners.  A joint report issued by the U.S Green Building Council (USGBC), the Natural Resources Defense Council (NRDC), the Real Estate Roundtable, and the American Council for an Energy Efficient Economy estimate that more than 77,000 construction, manufacturing, and service jobs would be generated nationwide.

The Energy Policy Act was signed into law in April 2005 – the first significant energy legislation since 1992.  Title XIII §1331 stated that energy efficiencies were to be encouraged through a procedure to apply tax deductions for the implementation of specific and broad based building efficiencies.  The Act includes a tax deduction, known as the Energy-Efficient Commercial Buildings Tax Deduction (26 U.S.C. §179D) for investments in “energy-efficient commercial building property” designed to significantly reduce the heating, cooling, water heating, and interior lighting energy cost – or improve the performance – of new or existing commercial buildings.  Section 179D includes full and partial tax deductions for investing in commercial building improvements that are designed to increase the efficiency of energy-consuming functions such as lighting and HVAC.  The deduction available is up to $.60 per square foot each for lighting, HVAC, and building envelope – a potential for $1.80 per square foot if all three components/subsystems qualify.

by Capital Review Group

There are numerous incentives and tax benefits available to owners of commercial properties who decide to complete energy efficiency projects.  You just have to know where to look.  Extensive documentation and research from reliable sources is readily available to commercial property owners to help ensure that your energy efficient building project has a positive impact on your bottom line along with the environment.

The Database of State Incentives for Renewables and Efficiency (DSIRE) is a comprehensive resource that is an effective place to start researching opportunities.  DSIRE was established in 1995 and is an ongoing project of the North Carolina Solar Center and the Interstate Renewable Energy Council.  It is funded by the U.S. Department of Energy’s office of Energy Efficiency and Renewable Energy.  This comprehensive database contains listings of commercial and residential tax deductions, tax credits, tax incentives and utility rebate programs for energy efficiency projects.

The incentives and policies included in DSIRE are reviewed regularly to ensure that the most current information is available, and each program summary is dated to indicate when it was last updated or verified.  DSIRE’s comprehensive listings include information on the policy type (rebate program, tax credit or net metering); whether it is federal, state or implemented by a utility; which technologies are eligible for the program; and which sectors are eligible.  In addition to summarizing the incentive or policy, the listings also contain links to the incentive or policy website, contact information, and links to relevant legal documents, authorizing statutes and regulations.

DSIRE includes information on federal incentives and policies for renewable energy and energy efficiency technologies, as well as a U.S. map for locating state incentives and policies.   DSIRE Solar provides information on incentives and policies specifically for solar energy projects.

The U.S. Green Building Council (USGBC) is another valuable source of information for commercial property owners considering energy efficiency projects, and the website (www.usgbc.org) features a variety of resources for all commercial property owners.

Capital Review Group has been featured in several publications recently:

Partnership for Sustainable Communities: “Financing Energy Improvements With Tax Incentives” By Marky Moore, Capital Review Group

Automated Buildings: EnOcean Alliance and the Connection Community Interview with Graham Martin, Chairman of EnOcean Alliance
Cindy Woudenberg, Director of Marketing for Capital Review Group, and Chair of the North America Marketing Work Group of EnOcean Alliance
Louis Hamer, Vice President, Product Strategy for SCL Elements/CAN2GO Inc., and Chair of the EnOcean Alliance Marketing Committee By Ken Sinclair

Hotel Executive: “Tax Deductions: Application of §179D for Hotel Properties” By Margaret Moore, Founder, Capital Review Group

Noesis Energy: Blog Postings

Lexis Nexis Real Estate Community: “Grasping the Tax Opportunities for Apartment Building Owners” by Capital Review Group

Two of the ways building owners can benefit from energy efficiency projects are by performing a cost segregation study and qualifying for deductions under §179D of  the Energy Policy Act of 2005.  A cost segregation study identifies and reclassifies personal property assets to shorten the depreciation time for taxation purposes, which reduces current income tax obligations. Personal property assets include a building’s non-structural elements, exterior land improvements and indirect construction costs.  Depreciation expense is accelerated and tax payments are decreased when an asset’s life is shortened, which frees up cash for investment in energy efficiency projects.

§179D includes full and partial tax deductions for investments in energy efficient commercial buildings that are designed to increase the efficiency of energy-consuming functions.  The deduction available is up to $.60 per square foot for lighting, HVAC and building envelope, creating potential for $1.80 per square foot if all three components/subsystems qualify. These deductions are applicable to buildings that were either built or retrofitted after December 31, 2005.  In order to qualify for the deduction, the taxpayer must receive a third party energy efficiency certification.

For taxpayers who haven’t claimed these deductions, completing a “Change in Method of Accounting” IRS Form 3115 allows private sector building owners to go back to “closed” tax years to January 1, 2006 to “catch up” and claim any missed deductions. No tax return amendment is necessary.  This means that a taxpayer could potentially claim deductions from 2006-2012 all on one return and significantly reduce their tax burden, if not eliminate it altogether which could recoup the cost of funding energy efficiency.

Primary designers of government buildings also have the option of going back to “open” taxes or three years from date of filing to amend a tax return, which may result in an IRS refund for overpayment of taxes with interest.  A new ruling by the IRS states that Primary designers MUST file an amended return to claim the deduction for open years and may not file Form 3115 “Change of Accounting” form to claim the deductions.

In addition to the potential tax benefits available to commercial property owners through meeting the requirements of §179D of the Energy Policy Act of 2005 and performing a cost segregation study (see our  blog post on this topic), hotel owners may benefit from additional tax strategies when planning energy efficiency projects. 

Effective Tax Strategies for Energy Efficiency in Hotel Properties

Hotel properties typically include numerous exterior features that may be eligible for 15-year depreciation, including some exterior concrete, possibly fencing, landscaping, asphalt and irrigation systems, among others.  Nonstructural elements throughout a hotel property such as cabinetry, countertops, millwork, wood wall coverings and vinyl floor coverings may often be reclassified to 5-year or 7-year depreciation.  A qualified professional can also look at the potential for equipment such as generators, telephone/data wiring, and certain plumbing systems to also be reclassified.

The hotel owner may also benefit from “abandoning” all five year assets prior to remodeling.  Individual assets being replaced may qualify for abandonment if they were never segregated in the accounting records of the business when the building was purchased.  If the books reflect just the large asset, such as “Building”, this means that the value of each individual asset is included in the value of the building.  Typically, the “Building” is being depreciated over 27.5 years for commercial residential or 39 years for commercial property.  These individual assets do have a value of their own, and when the time comes to replace them a tax deduction may be taken for the remaining value associated with those assets.

With the help of tax and engineering professionals, these strategies may reap significant benefits for hotel owners.  Additionally, commercial property owners should take advantage of the many federal, state and utility programs and incentives that may be applicable to your project.  There are a number of online resources available for research and information-gathering as energy efficient projects are being considered.

As we are continually working to bring the latest news on incentives we thought we would share this great overview from our friends at Advanced Lighting Guidelines Online (ALG).  ALG posted a great overview of an article by Craig DiLouie, published April 2012 by the Lighting Controls Association.  Here’s a synopsis:

Lighting Control Rebates Triple

Lighting has always played a strong role in utility rebates and incentives. The number of rebate programs available for lighting controls has almost tripled since 2009, covering occupancy and vacancy sensors, photosensors, daylight dimming systems and automatic time-based controls. Currently, rebates and other incentives covering lighting controls are available in 47 of the 50 states. Our latest ALG Connections piece highlights a recent Lighting Controls Association article by ALG Online contributing author Craig DiLouie. Read the latest ALG Connections (PDF) for more on the upswing in incentives, an interactive map link and rebate comparisons between retrofits and new construction.   http://www.algonline.org/pdf/ALGConnections_LightingControlRebates_July2012.pdf

How to Pay for Energy Efficiencies through §179D Energy Tax Incentives and Capital Discovery®   

Case in point:

Based on a qualifying square footage (88,000) of a warehouse and lighting project that was completed, a building owner was entitled to a §179D deduction of approximately $53,000. Additionally, the company received an abandonment deduction of an additional $92,000 for removing the old hi-bays. Ultimately, the Company increased efficiency by approximately 40% and received an immediate tax deduction nearing $145,000.

As a progressive facility manager or building owner in today’s economy, you understand that creating an energy efficient property/facility saves both long-term dollars and provides immediate impact by providing reliable performance, better working conditions, and lowering operating costs.  However, the first cost and the logistics of efficiency implementation may prove cost prohibitive.  Unfortunately, the dynamics of the evaluation and determination of efficiency systems coupled with the market difficulty in securing financing options presents a conundrum for the facility manger or property owner.  Questions posed are: “What is the best approach to evaluating more efficient systems?” and “Must I/my company provide the required capital for efficiencies or continue to face increased operating costs?”  Businesses are looking for innovative ways to leverage their energy needs and finance projects.   Most facility managers and property owners will assume that funding for energy efficient upgrades has to come from dipping into equity in the facility or from an outside funding source such a bank loan.

To address the ever persistent “bottom-line” financial needs for installations, design-builds, and retrofits for energy efficiencies, project goals need to be assessed first. First considerations are to determine which systems need immediate attention and which systems need to be addressed for long-term needs.  Pinpointing the need(s) and then creating a cohesive plan to ensure that maximum energy savings are met is just part of process.  Attention to efficiency requirements based on standards needed to meet incentives and tax benefit baselines should also be worked in for goals.  The process is, in effect, a 3-fold process that makes sense for building owner – assessing the scope of the project and then determining what efficiency measures need to be met in order to reach goals to lower operating costs and to meet financial incentives.

Capital Review Group in Phoenix, Arizona, has developed their Capital Discovery® process over years of successfully identifying tax effects that yield immediate and dramatic financial advantage for their clients and applying discovered capital to high-value energy projects.  Marky Moore, CEO of Capital Review Group, explains, “There are several strategies that may be employed to pay for energy efficiency projects by significantly lowering tax liability, including reclassification of real property (also known as Cost Segregation), abandonment, and §179D tax deductions.  Capital Discovery® is utilized by our team of experts to maximize clients’ savings and significantly enhance ROI on energy projects.” Capital Discovery® puts all of the financial strategies together for facility owners, customizing solutions that provide smart and innovative ways to fund energy efficiency projects.  The process also encourages evaluation of needs and the assessment of efficiencies that provide lowered operating costs.