179D Energy Efficient Commercial Building Tax Deduction

179D Agenda

• Overview of 179D• Key Issues• Opportunities• Examples• Myths• Questions

Agenda• Introduction• Overview of Current Federal

Incentives• 179D• Alternative Energy Property Tax

Credits• Other Incentives for

Designers/Owners–Cost Segregation–263a and 162a Repair

Regulations

Federal Tax IncentivesEnergy Efficient Building Deductions (179D)

-Owner-Designer

Alternative Energy Tax Credits-Solar-Wind-Geothermal

Energy-Efficient Building Deduction

The Energy Policy Act of 2005 allows a deduction for the cost of major energy-saving improvements or new construction.

• Placed in service after Dec. 31, 2005 and before Dec 31, 2013• Pursuant to a certified plan to reduce energy costs• Reduces energy cost by at least 50% in comparison to

reference building (Standard 90.1-2001)• Maximum deduction of $1.80 per square foot

Energy-Efficient Building Deduction

Partial deduction of up to $0.60 per square foot for each eligible building component• Interior lighting system

• Heating, cooling, ventilation, and hot water systems

• Building envelope (windows, walls, foundations, slabs, ceiling, roof system, and insulation)

Background

Established Under Section 1331 of the Energy Policy Act of 2005- IRS Slow to develop certification criteria

Rev Proc 2006-52 – Established Final Standards for Qualification/Certification

Rev Proc 2008-40 – Expanded 2006-52 to confirm how Architects Can Claim Deduction

Rev Proc 2011-14 – Clarified filing procedures for retroactive claims

Certification Requirements

Modeling of Energy Savings-Must be done utilizing software approved by the DOE-Public list of software exists at

http://www.eere.energy.gov/buildings/info/tax_incentives.html

Certification-Property must be Certified by an independent engineer or contractor licensed in the jurisdiction for which the building is PIS

179D – Transfer to Designer

Properties owned by government entities can transfer the deduction back to the person(s) primarily responsible for the design.

• Must be owned by a federal, state or local government

• Full Certification Required• Must be accompanied by a written statement

allocating the deduction back to the designer

This Creates a Permanent Tax Savings

179D – SavingsOwner Occupied Warehouse

A 100,000 SF facility meeting the requirements for the full $1.80/SF deduction would realize a current year deduction of $180,000.

• Tax Savings of $72,000 at a 40% tax rate in first year

• For Owners would create a NPV savings of approximately $50,000

179D – SavingsUniversity– Designer

DeductionA State University in Ohio constructed a new student center for a total project cost of $83 million (total square footage of 292,715). Upon review by McGuire Sponsel it was determined that they were eligible for full deduction on the HVAC and lighting systems (but not the building envelope).

• Tax Deduction of $351,258.

• Total Tax Savings of $140,503 at a 40% tax rate.

Interaction with Repair Regulations

• New repair and maintenance Regulations include the ability to abandon a portion of a larger asset when removed

• If lighting replaced the original lighting can be written off at the time of replacement

• Can lead to an even larger savings.

179D – Savings with Removal of Existing

Asset• A 500,000 sf warehouse built 4 years ago plans to

replace lights at a cost of $300,000.• Original lights were installed at a cost of $400,000

when the building was originally constructed (remaining basis $360,000)

• 179D allows for a deduction on the new lights of $0.60/sf or $300,000

• Abandonment on remaining basis of original lights $360,000

Total Deductions of $660,000

179D – Status in Current Legislative Environment

• Currently expires at the end of 2013• Most tax proposals include an extension or

expansion of the current deduction• One plan makes it a credit one increases

deduction• Most change reference building to

ASHRAE 2005 or newer

Repair and Maint. Regulations• New Temporary Regulations cover both 263(a) and

162(a)– December 23rd 2011

• New Regulations “Biggest Change to Capitalization Regulations in 20 years”

• Temporary Regulations are effective upon publication in the Federal Register

New Regulations Key Issues

• Repair vs. Capital– Less Liberal than 2008 Proposed Regulations– Based on “Highly Factual” information

• Retirement of Structural Component– Allows for retirement of a portion of a larger capital asset

• Remove Plan of Rehabilitation Doctrine– Carryover from 2008 Proposed Regulations– Disagrees with

• Moss v. Commissioner• United States v. Wehrli• Norwest Corp v. Commissioner

Opportunities• Anyone who has updated a property in the last 15

years• Clients with large annual capital expenditures• Taxpayers required by “corporate” to update

facilities• Industries

– Retail– Automobile Dealers– Manufacturing– Real Estate– Restaurants

Opportunities - Types• Ability to “write off” existing capital assets

– Structural Assets when removed can now be expensed– Items that may have previously been considered “capital” may

now be “Repair”• Review Existing Cap Ex Policies• 3115 – Change in Accounting Method

– To Reduce tax bill if taxpayer favorable adjustment– 2-year window to get “in compliance” with new regulations

• Cost Segregation Now More Valuable– Requires full engineering approach

Example• Automobile Dealer – Minneapolis

– Originally built in 1999 for $6,000,000– Renovation Cost $4,000,000

• “Traditional” Cost Segregation on Renovation would save – $180,000 in Year One– $170,000 NPV over life of investment

• Under New Regulations– $293,233 in Year One– $275,582 NPV over life of investments

Additional $113,000 in First Year!!!

WHY???• Write off $800,000 of Structural Assets Removed

in Renovation– Previously IRS would not allow for the disposal of a structural portion of

a larger Capital Asset– Under new regulations a portion of a larger structural asset can be

written off when Replaced• $120,000 in Assets Related to Construction

“Repairs” not “Capital”– No longer do we have to follow “Plan of Rehabilitation Doctrine”– Repairs included in a larger project can now be treated as Repairs

Interaction with 179D• 179D Provides for the Immediate Deduction for

the Installation of Energy Efficient Improvements• Most likely Betterments!• Disposal of Existing Assets

– If lights are replaced Taxpayer can:• Take 179D on New Lights• Dispose of Remaining Basis on Original Lights!

Disposition

• Allows for Retirement of a Structural Component– Previously if a structural component was part of a larger capital asset it was

not to be retired upon disposal– Temporary Regulations Now Allow for this– Example Roofs

• IRS Admits Value “may be difficult for taxpayer to determine”• Requires Consistency in Treatment of Asset Removed and

Calculation of Depreciation on Assets Remaining

ONE OF THE BIGGEST OPPORTUNITES IN THESE REGULATIONS!!!

Rev Proc 2012-19 and 2012-20

• Many Applied for Change in Accounting under Proposed Regulations– 2 years of audit protection

• Two Years to Comply to New Regulations

Two Years To Comply is only for Taxpayers Out of Compliance!!!

Example - Full Review• In 2012 we reviewed a portfolio of 30 Franchise

Restaurants.

• Study included reviewing all Restaurants for depreciation, repair and maintenance issues and removed assets.

• Average size per location $750,000 in new construction plus additional capital assets of $50,000 to $100,000 per location.

• Assets constructed or Acquired between 1990 and 2011.

Example - Full Review• Prior to Study total assets of $24,000,000 all listed as either

39-year real property or 15-year Qualified Restaurant Property.

Breakdown after Study39-Year Real Property $11,000,000

15-Year Property 7,000,0005-Year Personal Property 4,000,000Repair/Removed Assets 2,000,000

Example - Results• Total 481a Adjustment $6.5 Million

• Five Year Increased Cash Flow of over $2.5 Million

• Total NPV Savings in Excess of $2 Million

Cost Segregation ServicesIdea Description

• Accelerating Depreciation Deductions and increasing Cash Flow on Real Estate and Leasehold Improvements• Most Taxpayers Overstate 39-Year Real Property• A Cost Segregation Study Optimizes Depreciation

Deductions while Documenting and Supporting Asset Reclassifications

• Maximizing Personal Property Results in Substantial Cash Flow Benefits

Types of Cost Segregation Studies

• New Construction• “Ground Up”• “Improvements”

• Purchased Property• Retroactive

• “Fixed Asset Review”

Audit Techniques Guide

Cost Segregation Methodologies• Detailed engineering approach from actual cost

records• Detailed engineering cost estimate approach• Survey or letter approach• Residual estimation approach• Sampling or modeling approach• “Rule of thumb” approach

Cost Segregation Example:Manufacturing Property

Study Details:

A manufacturing client purchased and renovated a 100,000 square foot manufacturing facility at a cost of $11 million.

In McGuire Sponsel was hired to complete a cost segregation study as well as a 179D Energy Efficient Building Study.

Cost Segregation Example:Manufacturing Property (cont’d)

Study Results:

Our Team classified approximately 28% of the facility to shorter lives, helped the client realize $180,000 in 179D deductions, and secure 30% tax credits on more than $350,000 in photovoltaic cells.

These deductions and credits saved the client over $800,000.

QUESTIONS & ANSWERS

Contact InformationMike D’Alessandro, Principal

1275 Glenlivet Drive Suite 100Allentown, PA 18016610-395-1166 (office)

610-730-6302(cell)miked@mcguiresponsel.com