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Section 179D: Leveraging the Energy Efficiency Deduction for Commercial and

Government Buildings

179D Topics covered

• Evolution Of The 179D Deduction, And Future Outlook

• Material Terms Of The 179D Deduction

• Placed-In-Service Issues And IRS Guidance

• The Role Of Energy Studies

Energy Policy Act Of 2005

• What is EPACT ?

• What was congressional intent ?

• Impact of President Obama’s Better Building Initiative

Energy Policy Act Of 2005 (Cont.)

• Congress passed legislation in August 2005 to encourage property owners to

build energy efficient real estate properties, in order to promote reduction in

energy consumption. Service dates were from 1/1/06 through 12/31/08.

• The Emergency Economic Stabilization Act of 2008 (HR-1424), approved and

signed on Oct. 3, 2008, extended the benefits of the Energy Policy Act of

2005 through December 31, 2013.

• The ruling allows a tax deduction of up to $1.80 per sq. ft.

• The entity that funds the investment on a private property, or the designer

on a government-owned property, is eligible for the deduction.

Energy Policy Act Of 2005 (Cont.)

• For commercial buildings 2006-2013 (new buildings and renovations)

Private buildings (benefits - owner/tenant)

Public buildings (benefits - architect/engineer/contractor)

Lighting/HVAC/envelope (roof/windows/insulation)

$.60 $.60 $.60 = $1.80 per SF

$100k SF = $180,000

Model vs. ASHRAE 2001 90.1

Attention: Architects, Engineers And Contractors

For energy-efficient commercial building improvements (new build or

renovations) made by a public or government entity ...

• Examples: Schools K-12, colleges, universities, civil, municipal, government,

jails, military buildings, etc.

• The IRS now allows the deduction to be allocated to the “person primarily”

responsible for designing the property and systems, in lieu of the public

entity.

• Fewer than 3% of taxpayers or design firms are aware of opportunity - AIA

Journals

Who Benefits?

• Owners or tenants who pay for new or improved, energy efficient

commercial buildings since 2006 and through 2013

• Designers of energy efficient properties or retrofits/installed efficiency in

publicly owned buildings

• Building and real estate communities indirectly benefit.

Eligible Properties

• New construction

• Upgrades, renovations and retrofits, improvements to lighting, HVAC, envelope (roof ,

insulation, windows), energy performance contracting, CRA redevelopment

• LEED-certified buildings

• Green/energy-efficient buildings

• Commercial and residential (4-plus stories)

• Private and public sectors

• Types: Schools, government, office, retail, hospitality, industrial, manufacturing,

healthcare, parking garages

• Architects, engineers and contractors Placed in service since Jan. 1, 2006

In Summary, Maximizing The Benefits Of The Energy Policy Act

• Generates money for investments

• Increase cash flow through minimizing tax liabilities and

• reducing insurance premiums

• Increases ROI and reduces payback periods on investments

• Important: Planning and execution

MATERIAL TERMS OF THE 179D DEDUCTION

Energy Efficient Commercial Buildings

IRC Sect. 179D allows for an immediate deduction of up to $1.80/sq. ft. for

“commercial buildings” that achieve a 50% reduction in total energy and power

costs for lighting, HVAC and hot water systems, in comparison to 2001 energy

standards.

• Building envelope

• HVAC and hot water

• Interior lighting

Who Benefits?

• “Commercial buildings” includes

Public and government buildings (e.g., schools, prisons)

Typical commercial buildings (e.g., office, retail, industrial)

Housing that is 4 stories or higher

• Must be situated in the U.S.

$$$

What type of contraction is Eligible?

Ground-up construction

Renovations and retrofits

Applies to affected square footages (rate x sq. ft.)

PIS from 2006 through 2013

Key Variables Considered in a 179D Study

• Building type• Building size and number of stories • Physical orientation• Climate zone• Utility rates

Tax Process & Consideration

• Process:

Obtain certification package

No special form required• Reported on the “Other Deduction” line with a description of “Section 179D

Deduction

Reduce depreciable basis

• Considerations:

Deduction can reduce AMTI.

Subject to 1245 recapture

Can either amend or file Form 3115 to retroactively claim deduction

Deduction limited to amount invested in energy efficient property

Certification Process

• Analysis of drawings and as-built specifications

• Energy simulation modeling or lighting analysis, using DOE-approved

software

• On-site verification

• Signed certification by qualified third party that meets all IRS requirements

Independent Licenses Physical Engineer Firm must certify work

Practical taxpayer examples in claiming the deduction for

different types of improvements

How Does The 179D Affect The Value Of A Design Firm?

A design firm with $10 Million per annum revenue Designs 500,000 sq. ft. of

public buildings a year Generating $750,000 a year in tax deductions

$250,000 in cash (cash in hand, taxes paid

Assuming a 10-to-1 multiple, these deductions equate to $2.5 million in sales.

As a one-times-earnings multiple, this is an increase in the firm’s value.

Over $290,000 Energy Tax Deductions Claimed By Building Owner

Over $119,390 Energy Tax Deductions Claimed By Owner

Hampton In, Gainesville:66,328 square feet Envelope: Insulated glass, double-pane thermal-break windows and doors, white reflective single-ply roofing systmem

Lighting: Low-voltage fluorescent

HVAC: Natural gas units, split-unit system, motion-activated room thermostat, continuous-glow hot water service

Over $45,691 Energy Tax Deductions Claimed By Building Owner

Canon Stone Inc.HVAC: 76,153 square feet (Direct gas fired heater)

Over $124,813 Energy Tax Deductions Claimed By Owner

Renaissance Plaza – San Antonio – Texas – 208,022 Square feet

HVAC: Full $0.60 for HVAC and chiller unit

Over $292,137 Energy Tax Deductions Claimed By Architect

BLRB architects

Over $46,710 Energy Tax Deductions Claimed By Architect

Conference Center, Texas – 77,851 square feet

HVAC: Full $0.60 for HVAC and chiller units

Public Buildings And The 179D Tax Deduction

Contractors and Designers can qualify

§179D(d)(4): In the case of energy efficient commercial building property

installed on or in property owned by a Federal, State, or local government or a

political subdivision thereof, the Secretary shall promulgate a regulation to

allow the allocation of the deduction to the person primarily responsible for

designing the property in lieu of the owner of such property. Such person shall

be treated as the taxpayer for purposes of this section.

179D Energy Efficient Tax Deduction:Public Sector Green Building Projects • The Energy Efficient Commercial Building Tax Deduction is a federal tax

incentive that allows owners of commercial property to deduct from their taxes up to $1.80 per square foot for qualifying energy efficient property. It also contains a provision that allows public entities to give this tax incentive to the designer of the energy efficient property, since public entities do not pay taxes. This provision provides federal, state, and local entities a cost-effective way to improve energy efficiency in new or retrofit projects.

• The American Institute of Architects represents over 80,000 architects and emerging professionals across the world. As a leader in the design and construction industry, the AIA supports incentivizing energy efficiency in a myriad of ways, but particularly through provisions like 179D, that have proven to be quite successful in the field.

Public Sector Green Building Projects (Cont.)The Energy Policy Act of 2005 created the Energy Efficient Commercial Building Tax Deduction, recognizing that a substantial portion of U.S. energy consumption is attributable to commercial buildings, and to provide building owners with a tax incentive to help offset the costs associated with enhancing the energy efficiency of commercial buildings. The provision, codified in 26 U.S.C §179D and therefore sometimes referred to as “179D”, allows the owner of a commercial building to deduct the installation costs of energy efficiency enhancements, up to $1.80 per square foot.

Moreover, to encourage the public sector to utilize these same energy efficient enhancements, Congress provided a federal, state, or local government owner of a commercial building an election to allocate the tax deduction to the primary person responsible for designing the technical specifications for the installation of energy efficient enhancements.

The overarching purpose of the deduction is to encourage energy efficiency by creating a tax incentive intended to benefit a commercial building owner. If the owner of a commercial building is a private entity, the deduction may be taken by the building owner and is not allocated to the design firm. However, in cases where the building owner is a public entity, which does not pay taxes, the law allows for this deduction to be allocated to the design firm. Many agencies have used this allocation to finance energy efficient enhancements, despite not being able to receive a deduction directly for these enhancements.

The AIA and 179D The AIA strongly supported this provision when it was enacted. AIA also helped form a partnership with other concerned stakeholders and through this partnership, developed implementation recommendations for building owners to obtain this tax deduction. In 2008, the AIA helped pass legislation to extend the life of the deduction so that it covers property placed in service by December 31, 2013. That same year, at the AIA’s urging, the IRS issued guidance on how the deduction could be allocated to the designer.

The guidance established that a designer, for purposes of this section, included an “architect, engineer, contractor, environmental consultant, or energy services provider who creates the technical specifications for a new building or an addition to an existing building that incorporates energy efficient commercial building property.” This definition did not include someone that merely installs, repairs, or maintains the property.

Also, before a designer may claim the § 179D deduction, with respect to property installed on or in a government-owned building, the designer must obtain the written allocation from the “authorized representative.”

It also established that, in cases where there is more than one designer, the owner may either allocate the deduction to the primary designer, or, at the owner’s discretion, allocate the deduction amongst all of the designers.

The AIA was pleased with the initial clarification that this IRS guidance provided, and many agencies on the Federal and State level followed suit by issuing policies on the allocation of this deduction.

Federal agencies that already have established policy regarding the allocation of the 179D deduction include the Department of Defense and the General Services Administration. These policies guide project managers in understanding to whom the deduction should be allocated and the standard approach in doing so. State agencies also have established state-wide policy regarding this allocation, including North Carolina and Texas.

How Does 179D Work? A building qualifies for the full $1.80 deduction when the reduced energy use of its heating, cooling, ventilation, hot water, interior lighting systems, and building envelope is certified to exceed ASHRAE Standard 90.1-2001 by at least 50 percent.

Partial deductions of $0.60 per square foot are available for each individual component certified to reduce total energy use by 16 2/3% or more beyond ASHRAE 90.1-2001. These individual components are the interior lighting system; building envelope (defined as the outer shell used to protect the indoor environment); and the heating, cooling, ventilation and hot water system.

When the owner of the building is a public entity, the person(s) primarily responsible for designing the specifications of the qualifying components may request an allocation of this deduction. The designer will typically request a “letter of intent” so that he/she may begin the process of designing and certifying the property with the assurance that the public entity will follow through with the allocation afterwards.

Once the building is certified to meet energy requirements by a qualified individual using IRS- approved software, the agency may allocate this deduction by simply signing an allocation letter. The agency must reduce its “basis” by the amount of the allocated deduction, which is a bookkeeping requirement typically taken care of by the agency accountants.

Public entities that allocate this deduction incur zero liability for doing so. If a design firm is audited, and the allocation is reviewed, the public entity will not be held accountable for any denied deductions, and likely—will not have any involvement in the matter whatsoever.

Who Qualifies As The Designer/Contractor?

• Sect. 3.02 of Notice 2008-40 defines a designer of government owned

buildings as:

A person who creates the technical specifications for installation of

energy efficient property

May include architect, engineer, contractor, environmental consultant or

energy services provider

• It does not include a person that merely installs, repairs or maintains the

property.

What If There Are Multiple Designer/Contractor?

• Sect. 3.03 of Notice 2008-40 provides guidance on allocating the deduction.

If more than one designer is responsible for creating the technical

specifications for installation of energy efficient commercial building

property , the owner of the building shall:

• Determine which designer is primarily responsible and allocate the

full deduction to that designer, or

• At the owner's discretion, allocate the deduction among several

designers.

How Does The Designer/Contractor Obtain The Deduction?

• Sect. 3.04 of Notice 2008-40 provides guidance on obtaining the allocation from the

public entity.

The allocation must be in writing and contain all of the required information set

out in this section.

• Name, address and telephone number of authorized representative of the owner of

the building

• Name, address and telephone number of authorized representative of the designer

• Address of building, cost of property, date property was placed in service, and

amount of deduction being allocated to the designer

• Signatures by both parties, including a declaration signed under penalties of perjury

by authorized representative of the owner of the government-owned building .

How Much Of A Deduction Can The Designer/Contractor Get?

• Sect. 3.06 of Notice 2008-40 provides guidance on the tax consequences of the

allocation.

The maximum amount of the deduction that can be allocated is equal to the

lesser of the cost of the property to the owner, or the $1.80 per square foot (if

all three systems qualify).

The designer has no requirement to include any amounts in income for future

years, or reduce any future years’ deductions by an amount equal to the 179D

deduction received.

What Types Of Projects Are Good Candidates for Designer/Contractor?

• New construction

• Upgrades, renovations or retrofits

• LEED-certified buildings

• Currently must be a government-owned building; non-profit entities

currently not allowed

• Public schools, public universities, federal, state, city, township owned

properties

PLACED-IN-SERVICE ISSUES, AND IRS GUIDANCE

What If I Did Not Take The 179D Deduction On My Original Return?

Example: An automotive parts manufacturing company built a new 400,000-

square-foot, state-of-the-art facility on Jan. 1, 2007. No 179D study was

performed, and the lighting, HVAC and envelope were set up on a 39-year

depreciable life. The taxpayer filed its 2007 return on Sept. 15, 2008. The

company could have received the maximum deduction under Sect. 179D of

$720,000 ($1.80 X 400,000) had the study been performed in 2007. Instead, it

has taken $73,846 of depreciation ($720,000/39 years X 4 tax years) through

2010. The statute is closed to amend the 2007 return. Are there any options

available to this company?

Revenue Procedure 2011-14

• Prior to Rev. Proc. 2011-14, this company would have been out of luck. The

only option was to claim the deduction on an amended tax return at the

time.

§6511 generally only allows returns to be amended to claim a refund for

three years after the date of filing a return.

In our example, the automotive parts manufacturer would not have had

any means to go back and take the 179D deduction, since the project

was placed in service during 2007 and the statute for filing a refund

claim expired on Sept. 15, 2011.

Revenue Procedure 2011-14 (Cont.)

• Rev. Proc. 2011-14 was issued on Jan. 10, 2011 and now makes it possible to

claim a 179D deduction for years closed by statute under designated

automatic accounting method change No. 152.

This, in effect, allows a taxpayer to catch up the deduction in the current

year, using a change in accounting under appendix Sect. 8.04 of the Rev.

Proc. 2011-14.

Under our original example, the 481(a) adjustment would have been a

negative adjustment of $646,154 ($720,000 - $73,846).

Revenue Procedure 2011-14 (Cont.)

• Requirements of Rev. Proc. 2011-14

Sect. 5.04 requires a §481(a) adjustment which, in the case of a 179D

deduction, should be a negative adjustment that can be taken

completely in the year of change.

Sect. 6.02 requires that ordinarily, a Form 3115 be filed to apply for a

change in accounting method. However, this Rev. Proc. allows certain

changes to be made with a statement in lieu of a Form 3115. The 179D

change under appendix Sect. 8.04(3) is one such change.

Revenue Procedure 2011-14 (Cont.)

Requirements of Rev. Proc. 2011-14 (Cont.)

Sect. 6.02(4) provides guidance on what is required in the statement to

be filed in lieu of Form 3115. It provides that the automatic change

number of 152 be included on the top of the first page, directly above

the taxpayer’s name and federal EIN. It also requires a detailed

description of the tax treatment of the property under the present and

proposed methods of accounting.

Also, no duplicate copy is required to be sent to the national office.

Revenue Procedure 2011-14 (Cont.)

• Requirements of Rev. Proc. 2011-14 (Cont.)

Appendix Sect. 8.04(4) also requests a copy of the independent

certification required under Notice 2006-52 and Notice 2008-40 be

attached to the application statement.

Sect. 7.01 provides audit protection under this Rev. Proc. except as

otherwise provided.

Appendix Sect. 8.04(5) states no audit protection is provided in

connection with the 179D accounting method change.

Revenue Procedure 2011-14 (Cont.)

• Unsettled issue: What is a change in accounting?

Under the §1.446 regulations, the accounting of an “item” is an

accounting method.

• The question then becomes: Is each building an item, or should all

qualifying buildings be a single item of accounting for purposes of

§179D?

THE ROLE OF THE ENERGY STUDIES

Improve Building Value

Savings Increased With Complimentary Tax Strategies

Case Study Of Other Tax Benefits

This Will Provide ...

Abandonment Deduction

Abandonment: When assets are retired or removed, they are

taken off a company’s books (when you re-light a facility, you

essentially remove the old lighting).

This tax incentive can be substantial!

Accelerated Deduction

Accelerated Deduction (Cont.)

Total Tax Deductions

Converted To N.A.T.

Clients Results Explained

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