Real Estate

Break ground now in order to benefit from energy-saving tax breaks
 
Published Thursday, August 23, 2007

by Chad E. Crosby



The Energy Policy Act of 2005 (EPACT) created new tax incentives for installing energy‑saving improvements in a plant or other commercial building. Unfortunately, the law left several key issues unresolved. The IRS has issued a series of rulings providing much-needed guidance.

Under the EPACT, commercial building owners or leaseholders can claim a deduction for all or part of the cost of energy-efficient improvements placed in service after 2005 and before 2008. The deduction is generally equal to $1.80 per building square foot, less any deductions, less any aggregate deductions claimed in prior years. For example, if no prior deductions have been claimed, the deduction for a 100,000 square foot building is $180,000 ($1.80 times 100,000).

The IRS guidelines say that a qualified building cannot be a single-family home, a multifamily structure of three stories or fewer above grade, or a mobile or modular home. In addition, the improvement must be installed as part of the interior lighting systems; heating, cooling, ventilation and hot water systems; or building envelope.

To qualify, the annual energy and power costs must be reduced by 50% or more. However, you may be eligible for partial tax savings if the building meets a 16 2/3% energy savings target.

As part of this requirement, a building owner must obtain certification from a contractor or engineer that the improvement will reduce total annual energy and power costs by 50% or more (16 2/3% for the reduced deduction). The contractor or engineer who provides the certification must use computer software to calculate energy and power consumption and costs.

Calculation methods: Taxpayers must use the Performance Rating Method (PRM) to compute the percentage reduction in total energy and power cost. The IRS has established that the PRM includes the following three computations:

1. Reference building energy and power costs: This equals the sum of the energy and power costs for the following components of the reference building:

  • Interior lighting
  • Heating
  • Cooling
  • Ventilation
  • Hot water

2. Proposed building energy and power costs: This equals the sum of the energy and power costs for the same components of the proposed building.

3. Percentage reduction in energy and power costs: This is determined by subtracting proposed building energy and power costs from reference building energy and power costs. The difference is expressed as a percentage of reference building energy and power costs.

For this purpose, a "reference building" is a building located in the same climate zone as the taxpayer's building and otherwise comparable to that building except that its interior lighting systems; heating, cooling, ventilation, and hot water systems; and building envelope meet certain energy standards developed for the American National Standards Institute.

A "proposed building" is a building containing the interior lighting systems; heating, cooling, ventilation, and hot water systems; and building envelope that have been incorporated (or planned for incorporation) into the taxpayer's building. Key point: The EPACT provisions for commercial building improvements are scheduled to expire after 2007. As a result, plans should be developed soon if construction is intended to benefit from these tax breaks.

Chad E. Crosby is a Senior Manager in the Tax Services Department and is based in our Jupier office. Chad focuses on providing solutions to technical tax problems, minimizing tax liability, identifying opportunities for profit enhancement, expense reduction, asset protection and business process improvement, and consulting on complex tax and transaction matters. He has experience with divestiture structuring, mergers and acquisitions, state, local and international tax planning and compliance, and entity structure organization. Chad's clientele includes large multi-state, international corporate and flow through entities. He primarily serves companies in the manufacturing, retail, distribution and service industries. Contact Chad directly via email at ccrosby@daszkalbolton.com or by phone at 561.886.5278.


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