The Energy Policy
Act of 2005 (EPAct)
included provisions for tax deductions on energy projects for commercial buildings. What money remains available in 2013?
Nearly all of it. In fact, only 3.5% of the rebates authorized by EPAct for commercial buildings have been used to date, leaving a mammoth amount available in 2013. Building owners can deduct up to $1.80 per square foot for installation of property that reduces energy or power costs, including energy-efficient indoor lighting, heating and cooling, and envelope improvements. The upgrades need to be put into service by the end of 2013.
There is a draft bill in the Senate that calls for increasing the deduction to $4 per square foot and extending it through 2016. A vote on the bill could occur in March or April. I think there is an 80% chance that the bill will pass.
So how does a building owner get started on a project to capture the deduction?
The first and most important step is to benchmark building energy performance over a 24-month period using a tool like the DOE’s free, web-based Portfolio Manager program. The energy benchmark audit establishes the energy quotient for a building. The tax deduction is based on how well the building performs compared to similar buildings or a reference standard.
To qualify for the maximum $1.80 deduction, the upgraded building must perform at least 50% better than a reference standard. Deductions from $0.30 to $0.60 per square foot are available for energy reductions of 25% to 40% over a corresponding reference standard.
What is a reasonable payback to expect from an energy project?
From a practical point of view, there is no reason to go beyond 18 months when using the EPAct deduction. There are, of course, energy projects with far longer paybacks, including alternative energy projects like solar and wind. But for fast investments and paybacks, 18 months is an entirely reasonable goal. And the farther out a payback is calculated to be, the more uncertain it is.
It seems astounding that so little of the EPAct-authorized tax deductions have been claimed since the legislation was established. Is it because the tax filing process is a major burden?
I am not trying to be facetious, but anyone with a pulse can follow the filing process for the commercial tax deduction. It’s as easy as completing Schedule A for many individual taxpayers.
But people get bogged down. Even in large companies with dedicated energy managers, those managers may not be familiar with the tax and accounting issues that lead to the deduction, and the people in the organization who are familiar with those issues are often unfamiliar with the energy issues.
Are other incentives available for a project pursuing the EPAct tax deduction?
Absolutely. Many utilities, states, and municipalities offer incentives. In my experience, a typical energy upgrade project may draw on as many as four to seven incentive programs. It’s not uncommon for an energy project to have as much as 90% of the initial property cost funded by incentives. And the energy savings accrue to the owner year after year.
Energy consultant Bill Bissmeyer is president of B&B Consulting (bbenergyinc.com) in Indianapolis, IN.