Take Advantage of Tax Tools on Energy Projects

Dec. 6, 2013

Enlist accountants as your secret weapon for justifying action.

As evident from many industry surveys, the lack of funding remains a major barrier to getting projects approved. Most of the time, the go or no-go decision is based on simple payback, net present value (NPV), or some other project-oriented economic evaluation method used by operating personnel. However, we may be missing something that can help us “win” project approval.

This secret weapon is your accountant and the way they treat your project from a depreciation and tax perspective. Often the accountant’s input is not included when potential projects are evaluated, but the following information will show you why this can be critical to getting approval.

Although the EPAct 179D deductions will expire on December 31, 2013, there are additional tools that basically enable accelerated depreciation (receiving money from the government faster), which improves the economic evaluation for your projects far beyond the competition.

Seize Government Incentives
The U.S. federal government has established a variety of tax related tools that can provide added after-tax cash flow for an energy project. These include:

  • Cost Segregation
  • Asset Disposition (via the “repair” versus “capital” designation)
  • The EPAct 179D -Energy Efficient Building Design Deduction Benefit

To learn details about what each of these programs cover, see the “Tax Tools” table below.

  Description Potential Benefit Availability
Cost Segregation Cost segregation identifies certain building costs and reclassifies them to permit a shorter, accelerated method of depreciation- typically 5 to 15 years, instead of 27.5 to 39 years for traditional real estate assets. The net present value of writing off capital assets at a rapid rate vs. the standard 27.5- or 39-year straight-line depreciation and the ability to take advantage of potential bonus and/or qualified improvement regulations. Good for assets just being placed into service, but taxpayers can also do a “look back study” to reclassify older assets (typically advantageous to look back every 10-12 years).
Asset Disposition Take advantage of the recently released “repair vs. capital” regulations and write off the remaining cost basis of assets being retired or replaced. This approach improves focus on assets in the 27.5- or 39-year asset class life. The ability to expense or write off the remaining cost basis of the assets being retired or replaced. Good for as yet unfinished projects and to look back on older projects.
EPAct 179D A deduction related benefit focused upon interior lighting, building envelope, and/or HVAC assets. This can evaluate the design and construction against an established benchmark (ASHRAE 90.1-2001). This is a one-time deduction. A range of $0.30-1.80 deduction benefit can be achieved, depending upon the project scope and its performance against the program benchmark. Building(s) or improvement(s) placed into service between 1/1/2006 and 12/31/2013.

Typically, it would make sense to evaluate the above tools for a project with a minimum building value of $1,000,000 or improvement value of $500,000. However, there are exceptions to this rule of thumb. The best time to begin evaluating the potential availability is during the design process. A design review from the accountant perspectives could yield suggested changes that may aid in qualifying a marginal project for one or all of these tools. A review could also aide in increasing the yield collected from related other programs, such as utility rebates.

Success Story
To demonstrate the value of these accountant-oriented tools, consider a project that was recently completed for an office building purchased in 2005. This building underwent a $4,000,000 capital improvement project in 2012 with a scope that included an energy retrofit to replace all interior lighting and approximately 30% of the roof membrane as well as the fit-out for a new tenant in 30,000 square feet of office space.

The resulting economic benefits (using the tools above) were as follows:

  • Roof work was justified as an expense, generating a $24,500 tax benefit
  • Tenant fit-out work resulted in accelerated deprecation via cost segregation, which yielded first year tax savings of $539,000
  • A lighting retrofit produced both an EPAct 179D tax benefit of $165,000 and resulted in the disposition of the old fixture cost basis, which added another $190,000 in tax benefit

In total, the tools yielded over $900,000 in tax savings, or 22.9% of the project cost during the first year alone.

New Year, New Opportunities
As you begin to prepare for next year’s capital projects, explore how these beneficial programs could assist in adding economic benefits to help justify your projects. There are various resources at your disposal to evaluate these tools, which range from your CPA, contractors, or consultant partners.  The earlier you begin the evaluation process, the greater the opportunity of benefiting from one of these specialized strategies.  

It is also important to note that tax laws change regularly, so what you may have been able to achieve in prior years may not be available today.

For example, EPAct 179D will expire at the end of 2013 and may not be available in 2014 unless Congress passes an extension of the program. There have been rumors that a Senate proposal would extend EPAct for three years, through Dec. 31, 2016. The proposal would offer greater rewards if a building’s performance is above par – for example, a 50% energy cost reduction (compared to a baseline set by a more recent ASHRAE standard) would qualify for a tax deduction of $3 per square foot.

In addition, there could also be a federal tax deduction of up to $4.00 per square foot for commercial buildings 10 years and older. Again, don’t hold your breath on whether this proposal will become an actual extension, but it is worth noting the upside of the possibility.

You may want to call your government representative and ask about the extension or the creation of something better. Energy savings and independence as well as reducing vulnerabilities, externalities, and pollution should not be political issues.

Thanks to Bruce Johnson, CEM, MBA for contributing to this article. Bruce can be reached at 215.885.7510 or [email protected].


Eric A. Woodroof, Ph.D., is the Chairman of the Board for the Certified Carbon Reduction Manager (CRM) program and he has been a board member of the Certified Energy Manager (CEM) Program since 1999. His clients include government agencies, airports, utilities, cities, universities and foreign governments. Private clients include IBM, Pepsi, GM, Verizon, Hertz, Visteon, JP Morgan-Chase, and Lockheed Martin.

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